Nifty Rises Above 18,000 Points For First Time Since April, But Risks Remain

Indian equity benchmarks rose to a five-month high early on Tuesday, extending their winning streak to the fourth straight session, with the Nifty breaching 18,000-mark for the first time since April as bulls took control amid the brighter mood in global markets, despite domestic inflation rising back up after falling for three months.

Data on Monday showed a double whammy for Asia's third-largest economy, with industrial output slowing and consumer price index-based inflation surging back to 7 per cent, stalling a three-month downtrend.

The latest inflation data contradicts the Reserve Bank of India's broad predictions for a slowdown in price pressures and is likely to push the central bank to take a more aggressive rate hike strategy to counter inflation, mirroring the West - even at the cost of economic growth.

More analysts and economist now predict a larger RBI rate hike later this month.  

Still, the NSE Nifty-50 index rose 103.40 points, or 0.58 per cent, to 18,039.75, and the 30-share BSE Sensex index jumped 355.89 points, or 0.59 per cent, to 60,471.02.

According to information available on the BSE, foreign institutional investors (FIIs) invested Rs 2,049.65 crore in domestic shares on Monday.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, told PTI that the ongoing market rally is primarily driven by the sudden reversal of FII strategy.

"Retail investor support and fundamental support to the market from a strong economy are aiding the rally. Now, this has become a classic momentum driven market which has the potential to take the indices to new record highs soon," he said.

Reuters reported that domestic shares climbed to a five-month high, lifted by sharp gains in Bajaj Finserv and HDFC Life Insurance.

Financial services holding company Bajaj Finserv saw a 6.3 per cent increase in value before the record date for a stock split and bonus share issue.

Increasing 4.7 per cent, HDFC Life Insurance Company reached its highest level since June 9. According to Reuters, the British asset management abrdn plc would sell a stake in HDFC Life on Tuesday through a block deal.

"The good news for the markets is that a sliding US dollar is likely to further add to risk appetite," said Prashanth Tapse, Senior Vice President for Research at Mehta Equities.

"A new bull market could start if the US inflation report, which is expected to be announced in the evening, comes below the streets' expectation," he added.

Asian bourses extended the winning momentum from a global stocks rally ahead of key US inflation data, which is predicted to come in softer and show a peak in price pressures in the world's largest economy.

The Kospi, a stock market index in South Korea, jumped on the global rally bandwagon after a holiday and led a 0.6 per cent rise in MSCI's largest index of Asia-Pacific shares outside of Japan. Nikkei in Japan added 0.3 per cent.

After the S&P 500 had its greatest four-day run since June on Monday as a result of strong pre-order for Apple's iPhone 14 Pro Max, US stock futures were stable ahead of the US consumer price index-based inflation report, which will indicate and dictate the interest rate path.

Treasury yields and the dollar eased.

US bond markets imply that investors are growing more optimistic that the escalating inflationary pressures this year will be contained.

A gauge for where markets estimate inflation to be, the so-called breakeven rates on Treasury Inflation Protected Securities (TIPS) have decreased along with the cost of hedging high inflation.

Any potential upside surprise will likely see more volatility in rates," Giulia Specchia, a macro strategist at UBS Group AG in Sydney, told Bloomberg. "We do expect the monthly pace of inflation to slow notably over the remainder of the year."

Oil price declines have markets hopeful that US headline inflation will stabilise or slow, which is likely to ease the need for additional interest rate hikes in the future as currently feared based on the Federal Reserve's rhetoric.

However, analysts caution that core inflation is expected to continue and that the consequences for rates in the near term are not clear.

"It's too early to be celebrating the end of inflation, as some market participants seem already to be doing," Rob Carnell, an Economist at ING, told Reuters.

Crude prices have fallen nearly a third since mid-June and back to levels before Russia invaded Ukraine late in February, trading below $100.