How Nifty and Sensex got back to new highs

What triggered this change of heart in Indian stock markets?

During this week, the Nifty and Sensex scaled new highs. Interestingly, this index rally came at a time when global headwinds are still strong. The US economy is fighting a pitched battle against consumer inflation. UK and Europe are trying hard to stave off full-fledged recession. China wants to avoid a slowdown in growth, amidst rising COVID numbers. Despite these macro risks, Nifty gained 2.78% and Sensex 2.55% in November MTD. That may not be stellar monthly returns, but the resilience amidst global macro headwinds is surely stellar.

Data Source: BSE and NSE

Both the Nifty and Sensex scaled new highs during the month of November, after a gap of more than a year. What triggered this change of heart in Indian stock markets?

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Optimism in Indian markets: what are the triggers?

Broadly there have been 5 specific triggers that led to a surge in the Nifty and the Sensex to new highs in the month of November 2022.

1. A more subdued tone of the Fed, when it announced the minutes on 23rd November, was the big trigger. To be fair, the Fed is not giving up on its inflation battle, but promises that future rate hikes will be smaller. It is likely to be 50 bps in December and a few rounds of 25 bps after that. However, terminal rates would be well above 5%. 
   
    
2. The next trigger follows as a logical corollary. The skittishness in the market was caused by the Fed uncertainty. Rate hikes are not ending, but the uncertainty is ending. Traders, obviously, don’t want to remain short in these conditions. The markets have also seen a bout of short covering taking markets higher. That is likely to continue with the strong F&O rollovers in November expiry giving a hint of the optimism.
   
    
3. If there is one sector that has driven this index rally, it is banking, especially the public sector banks. On an average PSU banks are up 80% from their yearly lows and the PSU banking index rallied 35% in the last one month. A surge in net interest income (NII), improved net interest margins (NIM), lower provisioning and a sharp fall in gross NPAs were the key driving factors. In Q2FY23, financials accounted for 43% of the aggregate net profits of India Inc.
   
    
4. A weaker dollar combined with strong FPI flows in November have been key factors in this stock market rally. FPIs have infused over $3 billion in the month of November so far with half a week still to go. With the rupee already weakening from 74/$ to 83/$, FPIs are looking at a dual arbitrage in India on stocks and currency.
   
    
5. Finally, with an 85% dependence on crude oil imports, India has been a macro gainer as Brent Crude prices fell from $130/bbl to $84/bbl. That translates into lower trade deficit and lower CAD, giving a boost to markets.