Why Sensex can breach 22,000 by December 31
It seems the Diwali spirit has come to Dalal Street a tad early for this year. October saw the Sensex appreciate an astounding 8.44 per cent, going from 19,517 to 21,030 and hitting a new 5 year closing high on the 31st of October. Euphoria has hit the streets and there seems to be no indication of things changing anytime soon.
However, this column is not just about the present; it is about where the Sensex is predicted to head by the end of the year. The Sensex, without a doubt, has all indicators pointing towards an upwards surge that should push it past 22,000 by the end of the year.
Let's take a look at 5 reasons as to why this is likely to happen.
The Sensex has appreciated 9 per cent year to date: from 19,693 to its most recent closing price. Even if we were to use this rate of return as the benchmark for predicting the next two months (through the end of 2013), we get a forecasted Sensex of approximately 21,500 by the end of the year.
However, not all of 2013 was the same. The US Federal Reserve made its surprise decision to not taper down its quantitative easing program on September 18, which absolutely shocked the markets since some sort of tapering was expected. On September 18, the Sensex opened at 19,865. If we calculate the rate of return from September 18 through October 31 (6.5 per cent) and project that figure through the end of 2013, we get an astounding Sensex figure of 23,156.
Current Account Deficit Woes are Under Control
Earlier this year, there were worries that India's current account deficit was reaching dangerously high levels. India's current account deficit (CAD) has exploded 1125 per cent since 2007, going from $8 billion to $90 billion.
However, the Q1 figures released in August came in at $21.8 billion, and economists are expecting the final year end figure to be comfortably below $70 billion.
Furthermore, RBI governor Raghuram Rajan indicated that India is open to raise money from international markets, since the liberalization of borrowing has made it easier for lending to occur.
Finally, many economists are stating that the $70 billion dollar figure was calculated with US tapering factored in. Since it has become more and more evident that the US tapering is not expected anytime in the near future, C Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, has stated that the CAD is likely to go down well below $70 billion.
Stabilization of the Rupee
In August, there were legitimate worries that the rupee might hit 70 against the dollar. It seems that the currency was in chaos and nobody seemed to know what to make out of the situation.
Since then, the RBI and its governor, Raghuram Rajan, have done a tremendous job in bringing stability to the rupee by slowly increasing the repo rate and by lowering the marginal standing facility (MSF) rate. Currently, the repo rate stands at 7.75 per cent and the MSF rate stands at 8.75 per cent. This is exactly what the RBI intended to do since Dr Rajan took over as RBI Governor- to bring the difference down to 100 basis points.
Here is a graph that shows the stabilization of the rupee since August.
Now, obviously it would be far-fetched to think that the Sensex will breach 23,000 by the end of the year. But by using these two simple forecasting methods, we can see that 22,000 is conservatively within limits by the end of the year.
Increased FII Inflows due to RBI policy changes
There has been a huge increase in FII (foreign institutional investors) inflows into India in the past couple months. Aside from the obvious reason that the Fed's decision to cut back the tapering program has allowed the markets to surge, the RBI has also made some critical moves to ensure smooth FII inflows into the country. The RBI's decision to move towards easing liquidity into the markets by lowering the MSF rate for banks and narrowing the difference between the repo rate and the MSF rate gives the markets a strong sense of confidence.
Rumours of no US tapering of QE Program until 2014
This might be the biggest reason of them all. Due to the fact that there was a very real chance of a prolonged US government shutdown (and it did shutdown for 16 days), many US companies were severely impacted. The Fed has no choice but to put a halt to the planned tapering of its quantitative easing (QE) program. The US economy suffered losses of almost $50 billion due to the shutdown.
Furthermore, there is a Fed leadership change in January of 2014. US Federal Chairman Ben Bernanke, one of the biggest proponents of the tapering program, has his term as head of the Federal Reserve ending on 31st January, 2014. When a change in leadership occurs, major policy changes usually do not go into effect immediately. Therefore, it is safe to assume that there will be an adjustment period for the new Fed Chairperson before any tapering does occur.
On Tuesday, October 29, 41 economists were polled on what they expected the outcome of the Fed meet to be: all 41, unanimously, predicated that the Fed will not taper down its QE program anytime soon.
There is a famous saying, "every cloud has a silver lining". In August, nobody could have known that the Sensex would break all-time highs by the end of October. However, many things have changed since August. The 5 reasons mentioned above show that we are truly placed in a situation like never before.
We are now in a unique position where all indicators seem to point the markets in one, and only one, direction: up.
Note: This article originally appeared on NDTV Profit at http://profit.ndtv.com/news/market/article-5-reasons-why-sensex-will-breach-22-000-by-year-end-371119.