Sensex crosses 52,000-mark for first time as macro data shows recovery on track

With China and Hong Kong markets closed for the Lunar New Year holiday, Japan’s Nikkei led the way in which, climbing 1.9% to reclaim the 30,000-point level for the first time in more than three decades. Global shares rose for the 11th day in a row to achieve a fresh peak on the optimism about the rollout of covid-19 vaccines and new fiscal aid from the US, whereas tensions in the Middle East drove oil to a 13-month high.

Later in the week, all eyes will be on the release of minutes from the US Federal Reserve’s January meeting, where policymakers decided to leave rates unchanged, for hints to the likely direction of monetary policy.

“Indian equity benchmarks after a week of consolidation, clocked yet another session of record highs on the back of strong December quarter earnings. Strong corporate earnings have ignited hopes of faster economic recovery while buoyant global markets also aided risk sentiment. Moreover, better than expected December IIP number and January CPI number – which fell to 16-month low, boosted market sentiment,” Siddhartha Khemka, Head – Retail Research, Motilal Oswal Financial Services.

Retail inflation, as measured by the Consumer Price Index (CPI), fell to 4.1% year-on-year in January from 4.6% in December, primarily as a consequence of much lower food price inflation, whereas core inflation surprised on the upside. Headline inflation is near the Reserve Bank of India’s medium-term goal of 4% .Because of this, economists predict the RBI to focus on funding the high fiscal deficit at reasonable yields to nurse recovery.

“The comfort on headline inflation should allow the RBI to maintain its status quo on rates, stance and liquidity for now. However, as growth normalizes, so should the policy. We expect the process of liquidity normalization to begin in mid-2021,” said Nomura.

Indian markets have jumped over 10% after the Union budget was presented in the parliament on 1 February. However, rising crude prices is a threat to the overall economic recovery and will take the shine off Indian markets rally as the oil prices are headed towards $65 per barrel.

“The growth recovery is gaining momentum. If this trend is sustained, corporate profits will surprise on the upside in FY 22, bringing the stock valuations down. Rising crude price is an area of concern,” stated VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Corporate earnings grew at a robust pace in the December quarter in a bright spot for the Indian economy that’s searching for to ride out of the brutal results of the pandemic. Out-of-home consumption, festive demand and improved consumer sentiment, besides benefits of tight cost control led to better-than-expected earnings growth throughout the quarter.

Analysts are cautious that some of the cost rationalization measures by companies taken in previous quarters are likely to reverse as the financial system starts to open up. Rise in prices of major commodities is feared to hit gross margins but analysts expect companies to offset the impact through product price increases and cost-saving initiatives.