Indian stock markets in the April-June period rose nearly 20%, clocking their best quarterly gains since the September quarter of 2009 despite covid-19 severely hampering economic activity in the last three months.
The rally is largely driven by optimism of economic recovery post reopening of the country and a gush of liquidity flowing into the Indian markets, especially foreign capital.
The gain by the benchmark indices Sensex and Nifty in April-June came against a decline of 28% and 29% in the previous quarter, according to a Mint analysis.
Both BSE Midcap and BSE Smallcap indices were up 24.29% and 29.68% respectively in the June quarter. Sectorally, the biggest gainers were BSE Auto (42.29%) and BSE Telecom (36.08%).
However, this may not be an indication that India is out of the bear market yet. Analysts are not convinced that the rally in equities will continue and believe that the markets are staring at uncertainties with a lack of fundamental support.
The stock market rally is led by hope and liquidity and hence may not be sustainable if the ground realities of economic activities do not improve over time, according to Joseph Thomas, head of research, Emkay Wealth Management. “It may take another three months to accurately estimate the impact of the pandemic and the shutdown and another three months to discern the positive impact of the measures taken by the government and the Reserve Bank of India on economic growth, demand, and employment. If the numbers do not come up to the anticipated levels, which it is quite likely, it may result in disappointment and could lead to a corrective downward movement,” he said.
Uncertainty regarding the trajectory or growth, the behaviour of consumer inflation, the border conflict between China and India, and the run up to the US presidential elections may influence domestic markets from time to time, Thomas added.
Liquidity has been abundant in Indian markets in the June quarter. Foreign institutional investors (FIIs) were net buyers of Indian equities worth $3.91 billion in the three months ending 30 June, while domestic institutional investors (DIIs) have pumped in ₹1,0941.31 crore in Indian shares in April-June period.
Key risks other than that of the spread of covid-19, which may dent the positive sentiment, are failure of any large corporate or financial institution globally or in India, abrupt cross-border or cross-asset fund flows and excessive currency volatility, said Atul Bhole, senior vice-president, investments, DSP Investment Managers.
The Sensex and Nifty have risen 35.2% each from the lows of March. However, the markets are still nearly 17% away from the record high of January this year. So far this year, the Sensex and Nifty are down around 15%.