After going through a rough patch starting June, the Indian equity market emerged as the best performing market in the last one month in dollar terms, as a delay in tapering of quantitative easing (QE3), coupled with policy initiatives to help push dollar inflows, led to a rebound in the rupee and a pick up in buying activities from FIIs.
According to Bloomberg data, Nifty topped the list of world indices by clocking in positive returns of 18.4% in last one month. Sensex stood a close second with gains of 17.2% in the same period. The relative outperformance in Indian equities can largely be attributed to a rebound in the rupee, which has gained around 9% in last one month and closed at 61.74/$ on Thursday. On August 28, the Indian unit touched its all-time low of 68.825 against the dollar.
The recovery in the rupee came after a series of measures were announced by RBI governor Raghuram Rajan in early September. Rajan introduced special swap facilities for banks to reduce the currency risk on their foreign currency deposits and overseas borrowings, which are believed to have drawn in nearly $ 3.5 billion already.
The rebound in the Indian markets performance has also been aided by FII buying. Data show FIIs have net bought nearly $2.1 billion worth of Indian shares in the last one month, after having net sold $3.5 billion of equities during June-August.
Market experts said banks and interest rate sensitive stocks largely contributed to the gains in Indian indices, as most of these sectors had been beaten down against the backdrop of slowing growth in industrial production and overall economic growth, coupled with slowdown in consumption. Data showed sectors like banks, automobiles, metals and capital goods gave dollar returns of 22-30% during the last one month. In rupee terms, however, the returns appear modest, with gains from all these sectors ranging between 7% and 9%.
The risk free returns which the Sensex companies was around 8.5-9.0%, which was closer to the 10-year yield. Some of the companies, who have the potential to generate huge free cash flow, were trading at a steep discount and gave an indication of an upward price correction, Bhandari added.