Rs 80,000 crore FII buying sparks explosive rally on Dalal Street. Will RBI rate hike worries kill the party?

The Indian stock market has staged a stellar rebound since late October, with foreign investors turning net buyers and triggering a massive 9,000-point rally in the Sensex. However, beneath the rally, expectations of another Reserve Bank of India (RBI) rate hike are building. Analysts warn that certain factors could trigger a market correction and break the winning streak.Sensex crossed the 82,000 mark on Wednesday, marking the first time since February this year before the US-Iran conflict broke out, spiking oil prices and rattling global markets. This comes as foreign investors have been net buyers for every single day in November so far, and partially in the second half of October.

FIIs have net bought Indian equities worth around Rs 69,000 crore in November till Wednesday. Overall, FIIs have net bought Indian shares worth nearly Rs 80,000 crore since the middle of October. This came after a sharp selloff in the previous months that rattled Dalal Street.

Also read | FIIs are back with a bang but why are stocks from only 2 sectors their favourites?

Ironically, domestic investors who have been the bedrock of the Indian market even when FIIs hit the sell button consistently earlier this year have been heavily selling Indian equities recently. Many analysts pointed out that this may be driven by profit booking as their institutional investors are finally reaping the fruits of heavily buying Indian stocks during the previous selloff.

In the coming weeks, the sustainability of these foreign inflows will be the key variable, with heavy domestic profit-booking leaving the rally reliant on FII support, said Pabitro Mukherjee, Deputy Vice President of Research at Bajaj Broking.

“The AI sell-off has made India, which is widely regarded as a non-AI trade, attractive for FPIs. Furthermore, the impressive earnings growth in India and the attractive large-cap valuations made India a favoured investment destination,” said VK Vijayakumar, Chief Investment Strategist, Geojit Investments.

Also read | Promoters’ stake hits 3-year high while FIIs sink to 14-year low: What it means for Indian stocks

RBI to hike rates in December?

While the focus is on FII behavior, Dalal Street may be facing a strong headwind ahead. The Reserve Bank of India (RBI) Governor Sanjay Malhotra last month announced the central bank’s first rate hike in nearly four years, but market analysts said the shift to ‘calibrated tightening’ amid a challenging global geopolitical backdrop was the bigger takeaway.

RBI’s October rate hike came amid a global rate hike cycle. US Federal Reserve and several other central banks have been raising rates as the Middle East war spiked oil prices and resulted in inflationary pressures.

Will RBI rate-hike worries offset the impact of FII buying?

As we advance, the trajectory of crude oil prices, inflation trends and the RBI’s policy response will be crucial in determining the sustainability of the current rally, said Pabitro Mukherjee, Deputy Vice President of Technical Research at Bajaj Broking. While strong FPI inflows and improving global risk sentiment can provide near-term support to equities, sustained foreign buying will depend on continued macroeconomic stability, he said. “A moderation in crude prices and easing inflationary pressures could allow the current rally to extend, whereas a renewed spike in oil prices and a more hawkish RBI stance could trigger volatility and limit further upside,” according to the analyst.

Uttam Kumar Srimal, Deputy Head of Fundamental Research at Axis Direct, however, said the rate worry is already largely priced in, and the flows are responding to relative value and falling crude. A single 25 bps hike with a “hike or pause” stance isn’t a big enough headwind to reverse a rotation of this size, the analyst said, adding that the buying depends on crude staying soft and the AI rotation continuing. Both can reverse quickly. Foreign flows into India have been choppy this year, with sharp reversals.

The market is most likely to react if crude rebounds, the December MPC turns more hawkish than expected, for example with signals of a hiking sequence, or if FII buying fades, leaving a market that has run ahead of its fundamentals, Srimal said.

Disclaimer: This article has been written by Debaroti Adhikary, who is not a SEBI-registered Research Analyst or an Investment Adviser. Debaroti Adhikary and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here