In a global rally fueled by mounting expectations of imminent rate cuts by the US Federal Reserve, Indian equity markets soared to record highs on Wednesday. The Sensex achieved a historic milestone, surpassing the 72,000 mark for the first time and peaking at 72,120 during the day. However, it concluded the session at 72,038, registering a gain of 702 points or 0.98%. The Nifty also experienced significant growth, closing the session at 21,655, marking a gain of 213 points or 1%.
This surge in Indian equity benchmarks is attributed to optimism surrounding the likelihood of the US Federal Reserve implementing rate cuts as early as March next year. Robust foreign portfolio investor (FPI) flows have further contributed to the market’s bullish sentiment.
Throughout December, the Nifty achieved new highs in nine sessions, while the Sensex set new records during eight sessions. On an intraday basis, the Nifty reached new highs in 12 sessions, and the Sensex accomplished this feat in 10 sessions.
The recent easing of the Federal Reserve’s preferred inflation gauge has added momentum to expectations of aggressive rate cuts in the coming year. With the US personal consumption expenditure price index rising 0.1% from the previous month and 3.2% from a year ago, optimism is high for a 25 basis points rate cut in March.However, experts have issued cautionary notes, emphasizing the potential impact of geopolitical tensions, particularly in the Middle East, on the market’s trajectory. Despite the optimism surrounding rate cuts, concerns have been raised about elevated valuations in mid and small-cap stocks, prompting recommendations to reduce allocations to these segments.
On a positive note, India’s improving current account deficit (CAD) numbers have contributed to investor enthusiasm. The CAD for the July-September quarter stood at 1% of the gross domestic product (GDP), reflecting a decrease from the preceding quarter and the same quarter a year ago.Foreign portfolio investors (FPIs) have played a pivotal role in the market’s positive performance, being net buyers of Rs 2,926 crore on Wednesday and accumulating net purchases of Rs 47,531 crore in December – the best December since 2020.
Market breadth remained favorable, with advancing stocks outnumbering declining ones. HDFC Bank, rising 1.2%, made significant contributions to Sensex gains.
While the optimism continues, experts advise caution, emphasizing the need for a balanced approach as valuations run ahead of fundamentals. Large caps are recommended for better risk-reward over the next few months, while allocations to mid and small caps may warrant reduction.