Sensex and Nifty rise for a fifth day to two-month highs: capital goods lead, IT lags, services PMI at 55.8

The advance was broad. On the BSE, 3,074 shares rose, 1,313 fell and 210 were unchanged, and 26 of the 28 sectoral indices finished higher. Capital goods led with a gain of 3.6%, followed by realty and services, each up about 2.8%. Of the 30 shares in the Sensex, 21 gained. Smaller companies joined in: the NSE Midcap 100 index rose nearly 1.6% and the Smallcap 100 index 2%, so the move was not confined to large companies. IT was the exception, with the BSE IT and Focused IT indices each down about 1.2%.

The pattern has a shape. Companies tied to domestic investment and demand, from defence electronics and capital goods to realty, a jeweller and an airline, gained, while the three large IT services companies all fell by more than 1.5%. That is a rotation within the market and not only a rise in it: money moved towards businesses that earn in rupees from Indian spending and away from those that earn in dollars from American clients.

What is behind the rally

Four things are cited for the five-day advance, and the domestic data offer a fifth. The first is crude oil. Brent traded around $103 a barrel on Wednesday after touching nearly a four-week low in the previous session, which eases the import bill and the inflation outlook for a country that buys most of its oil abroad. The second is foreign money: provisional exchange data show foreign portfolio investors bought Indian equities worth Rs 6,837 crore on Tuesday, their fifth buying session in six. The third is positive corporate earnings. The fourth is the shift in US politics. Democrats won control of Congress in the midterm elections held on 3 November, and investors turned their attention to what the American administration does next on West Asia, which matters to India through oil.

The fifth is the economy itself. The HSBC India Services PMI rose to 55.8 in October from 55.2 in September, a four-month high, and the composite output index rose to 56.2 from 55.9. Domestic demand was the main driver, sales grew at their fastest pace since June, and all four broad service categories saw faster growth in new business, with finance and insurance leading. Input prices rose at their slowest pace in over six years, which is the kind of reading that makes a rate-sensitive market comfortable. The rupee also held up: it closed at 94.65 to the US dollar on Wednesday, a gain of 10 paise, with the dollar index at 101.45.

The picture was not one-sided on Wednesday morning. GIFT Nifty pointed to a weaker opening, and Asian equities and US futures were under pressure, yet domestic shares rose. There are also risks. Trade talks between India and the United States on a bilateral agreement could be affected by the change in Washington, and restrictions on H-1B workers and student visas remain a source of uncertainty for India, which bears most directly on the IT services companies that fell.

What to watch next

From the 30 October close of 23,053, the Nifty has gained about 3.9%, and about 5% from where the run began. A market that has risen that far in five sessions is sensitive to anything that interrupts the supports above, so the first thing to watch is crude. A rise in oil again would test the argument that lower crude is behind the rally.

The second is foreign flows. A run of buying has supported the index, and one or two sessions of selling would show how much of the gain rests on them. Domestic institutional data for Wednesday were not available at the close, and they matter as a counterweight.

The third is breadth. A rally that carries midcaps and smallcaps higher, as this one did, is healthier than one held up by a few large shares, but smallcaps that gain 2% in a day can lose the same amount just as quickly.

The fourth is the IT sector. Its fall on a day when 26 of 28 BSE sectors rose points to a rotation, and the next quarterly updates from the large services firms and any news on US visa rules will show whether it is a pause or a trend. The exchanges publish provisional trading figures after each session, and they are the record to check before relying on any single day's move.

This article is for information and is not investment advice.