Indian Rupee Advances Most in 5 Months as Stocks Hit Record Highs

Key Takeaway

• Indian equity benchmarks NSE Nifty 50 and S&P BSE Sensex hit record highs, driven by RBI's $25 billion dividend and election optimism.
• Adani Group shares surged, adding $7 billion in market value; Adani Enterprises rose 7.8%.
• Despite FIIs pulling $3.6 billion in May, the market shows strong momentum with potential for further gains if short positions are covered.

Record Highs for Indian Benchmarks

India’s main equity benchmarks, the NSE Nifty 50 Index and the S&P BSE Sensex, closed at new all-time highs on Thursday. The Nifty 50 Index rose 1.6% to 22,967.65, while the Sensex climbed by the same magnitude. This surge was driven by a combination of factors, including a significant dividend payout from the Reserve Bank of India (RBI) and optimism surrounding the ongoing general elections. State-owned firms also saw a rally, with a BSE gauge of such stocks reaching a record close. Adani Group shares added about $7 billion in combined market value, with Adani Enterprises Ltd. surging 7.8%.

Santosh Meena, head of research at Swastika Investmart, commented, “The market is experiencing a short-covering rally, which appears to have further momentum.” He added that the RBI’s record dividend “is akin to an indirect rate cut for the economy, as it is expected to lead to a reduction in bond yields.”

RBI's Record Dividend

The Reserve Bank of India announced a record dividend of 2.1 trillion rupees ($25 billion) to the government, more than double what was budgeted. This substantial payout is expected to boost fiscal revenues before a new administration takes office after votes are counted on June 4. The dividend not only strengthens federal finances but also signals strong confidence in the economy.

Rajesh Palviya, Head of Technical & Derivatives Research at Axis Securities, noted, “This is giving confidence to the market on the fiscal deficit front because this is a surplus of Rs 1 lakh crore from the RBI. This a surprise for the market as the market was projecting a Rs 1 lakh crore dividend.” He further explained that this surplus might lead to increased spending on infrastructure, benefiting sectors like infra, railway, and capital goods.

Santosh Meena from Swastika Investmart also highlighted the macroeconomic significance of this development, stating, “This development is a significant macroeconomic positive for the market, with direct implications for the fiscal deficit and bond yields.”

Election Optimism

Investor sentiment was further buoyed by optimism regarding the outcome of the ongoing general elections. Prime Minister Narendra Modi told The Economic Times that his party has already crossed the majority mark by winning 272 out of 543 seats in the lower house of parliament, positioning him for a third term. Modi had predicted that his party and its allies would win more than 400 seats, ensuring the continuity of economic reforms.

“There was nervousness about election results but considering how the polling phases have panned out in the last five phases, it is in line with the 2019 elections. So, there is no dullness on the voting percentage. That gives confidence to the street about the incumbent government coming back to power,” said Rajesh Palviya of Axis Securities.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, added, “The Nifty hitting a new record is the market’s message of political stability after the elections. The rally is healthy since it is led by fairly valued largecaps.”

Market Dynamics and Future Outlook

The market rally was also supported by India Inc's Q4 financial results, which showed no negative earnings surprises. Largecap IT stocks and banking stocks contributed significantly to the rally, with Adani Enterprises and HDFC Bank stocks gaining 8% and 2%, respectively. However, Sun Pharmaceutical and Power Grid were major laggards, falling 3% and 2% due to weak Q4 earnings.

Midcaps and smallcaps have also been performing well, frequently registering new highs. Ruchit Jain, Lead Research Analyst at 5paisa, noted, “This indicates that the broad market participation is quite strong.” However, he cautioned that some pockets have become a bit overbought.

Foreign Institutional Investors (FIIs) have been net sellers in Indian equities recently, pulling $3.6 billion from local shares so far in May. Despite this, the market is experiencing a short-covering rally that appears to have further momentum. Santosh Meena from Swastika Investmart mentioned, “Despite continuous selling by FIIs in the cash market, there is now an anticipation that they may shift to buying, which would provide additional support to the market.”

Ruchit Jain added, “FIIs have formed decent short positions in the May series and despite this market rally, those short positions are still intact. About 69 percent of their positions are still on the short side. If the market continues to show strength, then those shorts could come to cover and that would keep propelling further upmove in the market.”