Indian stocks set for new high on foreign inflows as central bank holds interest rates

The Bombay Stock Exchange building in Mumbai. India’s stock market has been supported by a stable earnings outlook. EPA

Indian equities headed for record closing highs as foreign funds piled into the market, lured by the promise of faster economic growth and an extended pause on interest rates.

Equities rebounded from this year’s lows touched in March as global funds, disappointed by China’s uneven recovery, boosted their holdings of Indian stocks to capitalise on one of the fastest growth rates among major world economies.

Global investors have bought more than $7 billion of local stocks since March, on track for the biggest quarterly purchases since the end of 2020, as China’s patchy economic recovery also helped to boost India’s appeal.

The benchmark S&P BSE Sensex jumped as much as 0.2 per cent to 63,295.98 on Thursday, breaking past the previous record closing high of 63,284.19 in December.

The NSE Nifty 50 Index also climbed, approaching unprecedented closing levels.

The rally may have more legs, with the Jefferies Financial Group saying last month that it was only a matter of time before the Sensex hits the 100,000 level.

India’s stock market has been supported by a stable earnings outlook and also by a rebound in Adani Group stocks after short seller Hindenburg Research’s report earlier in the year triggered a heavy sell-off.

MSCI India Index constituents’ earnings are projected to grow by 11.9 per cent this year, the second-fastest pace in Asia and other emerging markets, according to data compiled by Bloomberg Intelligence.

Data released last week showed India’s economy grew by 7.2 per cent in the year to March 2023, higher than the 7 per cent median estimate in a Bloomberg survey.

The finance ministry expects the economy to expand by 6.5 per cent in the current year, higher than 5.2 per cent forecast for China by the International Monetary Fund.

The Sensex has bounced back by about 10 per cent after briefly entering correction territory in March.

Steady earnings from lenders in the March quarter and expectations of a revival in rural consumption are also supporting sentiment in the $3 trillion stock market.

On Thursday, India's central bank kept interest rates on hold for its second straight meeting, citing easing inflation pressures, but warned about an uncertain global outlook.

The benchmark repurchase rate was left at 6.50 per cent by the Reserve Bank of India, Governor Shaktikanta Das announced in a webcast, in line with expectations.

“The Monetary Policy Committee decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth,” Mr Das said.

“Headline inflation still remains above the target [but] being within the tolerance band is not enough. Our goal is to achieve the target of 4 per cent going forward.”

Inflation hit a peak of 7.79 per cent in April last year, well above the RBI's target range of 2 per cent to 6 per cent, before slowly easing to 4.7 per cent in April.

India's economy expanded by 6.1 per cent from January to March, the final quarter of the fiscal year, to take annual growth to 7.2 per cent.

The South Asian nation of 1.4 billion people, which recently overtook China to become the world's most-populous country, is one of the fastest-growing major economies.

Central banks around the world, including the RBI, have rapidly increased borrowing costs to tame consumer prices made worse by Russia's invasion of Ukraine.

The Reserve Bank of India kept interest rates on hold for its second straight meeting on Thursday, citing easing inflation pressures. Reuters

Despite easing inflation, Mr Das cautioned that a key risk factor was the warming El Nino weather phenomenon, which could weaken the monsoon and lift crop prices, stoking inflation.

Agriculture is a key cornerstone of India's economy and the annual monsoon is crucial to its food output.

“Close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remains uncertain,” Mr Das said.

“Geopolitical tensions, uncertainties around the monsoon and international commodity prices, especially sugar and rice and also crude oil, and the volatility in global financial markets pose upside risks to inflation.”

Headline inflation was projected to hit 5.1 per cent in the 2023 to 2024 financial year, he said.

Agencies contributed to this report