Sensex soars 684 points, but the rally may not have legs

Indian stock markets joined a global rally on Thursday as the US Federal Reserve unexpectedly decided against tapering of the economic stimulus. From London to Tokyo, Istanbul to Mumbai investors celebrated the prospect of continued stimulus in the world's largest economy. The BSE Sensex surged over 3 per cent, marking its highest close in nearly 3 years, while the broader Nifty closed above the key 6,100 levels. However, analysts questioned the sustainability of Thursday's monster rally.

 

 

Here's why Thursday's "Fed rally" may not have legs:

1. Good news is bad news: Andrew Freris of BNP Paribas Wealth Management told NDTV that the Fed's decision led to a "lovely, unexpected reaction, but after the weekend we markets will go back to normal...and investors will start asking that if the Fed didn't tighten in September, when are they going to tighten?" Robert Prior of Credit Suisse told NDTV that markets having over-reacted to fears of tapering are overreacting in exactly the opposite direction now.
2. Less incentive to push tough reform measures: The Fed's decision means India's economy will get more breathing room. Portfolio flows will soon return to emerging markets and India will benefit as the balance of payment (BOP) pressures begins to ease. However, policymakers may be lulled into a sense of complacency and slow the reform momentum, Nomura added. Rajiv Malik, senior economist at CLSA was of the same view. "With the easing of pressure, it is more likely that some of the more difficult decisions pretty much get kicked down the road," Mr Malik told NDTV.
3. Current account deficit may start rising: If the currency starts to appreciate (as it did today), imports will become cheaper and in the absence of a domestic supply response, this would result in imports starting to substitute domestic production. "We expect India's current account deficit to start to widen again and imported inflation (through higher commodity prices) to rise," Nomura said.
4. Inflation may start rising: If imported inflation pressures starts to build, then the RBI will still be unable to cut policy rates to support growth. Growth will face additional headwinds from a forced cutback in government spending. Nomura says, "When the initial euphoria fades, we believe the weak growth outlook will likely result in outflows from growth-sensitive equity inflows."
5. Macroeconomic imbalances: Global brokerage Nomura says the 'no taper' decision has led to a spike in oil and gold prices, which will start to impinge on both the import bill and inflation. In India nothing has changed, Mr Freris said, adding, "The CAD is still there...the rupee is unlikely to go to 54 per dollar and I don't think the number 6 is going to leave the rupee exchange rate any time soon."