Sensex Jumps 1,100 Points, Nifty Gains 300+: 5 Key Factors Explained

In a remarkable fifth consecutive session of gains, the domestic equity market in India soared to record highs on Monday. The BJP's impressive victories in three out of five state elections fueled the bullish trend, instilling confidence in investors about the incumbent government's potential third consecutive term. A surge in foreign investor inflows, declining US bond yields, robust GDP growth, and optimistic expectations of no further rate hikes also contributed to the market's upward momentum.

Nifty index rose by 334.6 points, hitting a record high of 20,602.50, while the Sensex surged 1,106.6 points to reach a peak of 68,587.82. This marks the Sensex's highest point since September 15. In just the first two sessions of December, the Indian markets increased by 2%. Midcap and smallcap indices reached fresh record highs, with the Nifty Midcap 100 index up 1.7% at 44,148.90 and the Nifty Smallcap 100 index up 2% at 14,514.90. This indicates a strong and widespread bullish trend in the Indian stock market.

Here's a detailed breakdown of the key factors contributing to this remarkable rally:

1. Political Stability Boosts Markets

The BJP secured victories in Madhya Pradesh, Rajasthan, and Chhattisgarh, surpassing exit poll predictions. Retaining Madhya Pradesh with a strong majority and reclaiming Rajasthan and Chhattisgarh, the BJP's vote share differences with the Congress stood at 8.2%, 2.2%, and 4.2%, respectively. This clear mandate in four crucial states, accounting for 75 Lok Sabha seats, influenced the market's positive sentiment.

2. Foreign Inflows

After experiencing two months of significant outflows, foreign portfolio investors (FPIs) reversed their stance in November. The decline in US treasury yields and a softer dollar, coupled with the perception that the US Federal Reserve might halt interest rate increases, led to FPI inflows into Indian equities. FPI inflows into Indian equities totaled ₹9,001 crore in November, a notable recovery from the ₹39,000 crore worth of shares sold in September and October combined. In a single session on December 1st, FPI inflows surged to ₹9,744 crore, according to NSDL data. This swift turnaround indicates a positive shift in foreign investor sentiment towards Indian markets.

3. Robust Domestic Economic Indicators

India's Q2 GDP growth exceeded expectations at 7.6%, outperforming the estimated 6.8% predicted by economists. This strong macroeconomic performance added to the positive market sentiment, indicating a resilient domestic economy.

4. Expectations of Stable Monetary Policy

Expectations are high that the Reserve Bank of India (RBI) will maintain its current benchmark interest rate as the Monetary Policy Committee (MPC), led by Governor Shaktikanta Das, convenes from December 6 to December 8. The decision, scheduled for Friday, December 8 at 10 am, will mark the fourth MPC meeting for fiscal 2023-24 and the last one for calendar year 2023. The RBI has held the repo rate steady at 6.5 percent since February, and the market anticipates a continuation of this stance, given India's retail inflation persisting above the 4% target.

5. Global Market Trends

Global market's bullish trend was influenced by the belief that the European Central Bank concluded its rate-hiking cycle amid easing inflation. The US market, in particular, witnessed a 10% rally in November. Positive statements from US Federal Reserve Chairman Jerome Powell about slowing inflation and a cautious approach to interest rates further contributed to the favorable global backdrop.

Final Words

Jefferies suggests that the BJP's strong performance in three state elections is likely to benefit domestic cyclical sectors, including banks, industrials, power, real estate, and midcaps.