The benchmark Nifty index shot up 1.76% and investors turned richer by ₹7 trillion on Friday as institutions scooped up cash shares and derivatives, backed by retail participation through mutual funds. Market veterans were puzzled by the surge, which follows the surprise tax hikes in the Union budget and weak earnings in the banking sector.
The Union budget raised the long-term capital gains tax on profits from share sales to 12.5% above ₹1.25 lakh from 10% above ₹1 lakh, while increasing the short-term capital gains tax to 20% from 15% earlier. Market experts said the market reaction shows investors have taken it in their stride.
The 50-share Nifty hit a fresh high of 24861.15, surpassing its previous record of 81587.76 on 19 July, before closing at 24834.85, driven by Infosys, Bharti Airtel, ITC, Reliance Industries and Mahindra & Mahindra, accounting for over a third of the index’s movement. The Sensex, which failed to cross its record high of 81587.76 on 19 July, closed up 1.62% at 81332.72.
FIIs turn purchasers
After three straight days of selling ₹7,255 crore worth of shares, foreign institutional investors (FIIs) purchased a provisional ₹2546.38 crore on Friday, while domestic institutions purchased a provisional ₹2774.31 crore, totalling ₹6,988 crore of buying since the budget, show Bloomberg and BSE data. FIIs resumed buying on data which showed the US economy expanded by 2.8% in the June quarter, bettering estimates of 2% polled by economists polled by Reuters, which drove US benchmarkshigher.
Retail investors who buy directly on NSE invested ₹5178 crore on 23-24 July, show NSE data, while data for Thursday and Friday was awaited.
Overall market cap hit ₹452.93 trillion on the NSE. Market breadth was firmly in favour of advances, with two stocks advancing for every one that declined.
“Frankly, given the increase in capital gains tax and a mixed bag of results, I expected the market to drift lower, but retail liquidity held the market up smartly post the budget and drove Nifty to a fresh high today, when even FIIs resumed buying,” said Siddhartha Khemka, head of research (retail) at Motilal Oswal Financial Services. “Investors have taken the tax hikes in their stride,” added Khemka.
Indeed, 536 companies which have declared June quarter results reported a sequential 7.2% decline in net profit to ₹1.53 trillion, Capitaline data showed.
Surprising rally
“Looks like a combination of retail buying and FII incremental buying in index futures have driven the market higher since the budget despite the disappointment in quarterly earnings thus far and the tax hikes, which investors seem to have reconciled themselves to,” said Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies.
Holland said the banking sector, the mainstay of the market, was underperforming on the net interest margin front and thus, Friday’s rally came as a “surprise.” Holland termed results of the likes of Axis Bank and HDFC Bank a “disappointment.”
Apart from resuming cash buying on Friday, FIIs also increased their aggregate net index futures position (Nifty and Bank Nifty) to 132,177 contracts on Friday from 62,416 contracts on Thursday.
The Nifty rollovers on Thursday from the July to the August series – derivatives contracts expire on the last Thursday of every month – also showed that market-wide futures open interest at the beginning of the August series of contracts at a historic high of ₹4.50 trillion, implying continuation of the “bullish momentum,” said Abhilash Pagaria, head, Nuvama Alt & Quant Research.