NIFTY50 soars over 1,000 points in four sessions; here’s what is driving the rally

Indian benchmark indices saw a sharp rise on Tuesday, extending their gains to the fourth consecutive session, despite sharp correction in global markets. US markets fell as much as 3% in the previous week. Similarly, the Japanese Nikkei closed the previous week in the red, while the Korean KOSPI pared early gains to close flat. Meanwhile, the Indian benchmark indices surged 2% in the same period, bucking the broader trend.

Healthy Q2 earnings

Most of the NIFTY50 constituents posted steady-to-strong earnings for the September quarter. IT stocks like HCL Technologies, Tech Mahindra and TCS, which have a high weightage in the NIFTY50, rallied after their quarterly earnings release, bouncing back from 52-week low levels. Further, shares of index heavyweight Reliance Industries rose over 11% on Monday after the company delivered over 40% YoY growth in net profit for the quarter. The superior growth by the index heavyweights and subsequent rally in share prices, accelerated the rally in short period of time.

FIIs buying returns

Foreign institutional investors (FIIs) who sold shares worth ₹34,843 crore in October, have now resumed buying in Indian equities again. In the previous week, FIIs added Indian equities worth ~₹8,600 crore, leading to a 1000-point rally in the NIFTY 50. The NIFTY Midcap 100 and Smallcap 100 indices also saw meaningful gains in the last week, propelled by FII buying.

India as the “reverse AI trade”

Global investors grew skeptical of tech stocks amid their overheated valuations after earnings failed to deliver any measurable outcome on the massive investments in AI infrastructure. Shares of Alphabet, Amazon, and Intel Corporation witnessed a sharp fall after earnings failed to beat estimates. Moreover, the companies also reported negative free cash flows and increased debt to fund the increasing capex on AI investments. Consequently, investors booked profits in AI and technology stocks and rotated their investments to safer and more affordable bets.

Sharp fall in crude oil prices

Crude oil prices cooled off last week after supply disruption fears abated in the Middle East. Monday, crude oil prices fell by 8%, boosting the sentiment for Indian equities. Further, US President Trump recently stated that he favour peaceful resolution of the conflict, following which Brent crude oil prices fell from the six-month high level of $117 per barrel to $103.2 per barrel on Monday.

Buzz around LTCG tweak

Amid media reports claiming impending tweaks on capital gains tax structure, SBI Research has made clear case with few proposals to tweak rules of long term capital gains (LTCG) tax. The report highlights to raise the threshold for LTCG tax from ₹1.25 lakh to ₹2 lakh and increase the exemption tenure for gains made withing three years. Media reports also indicate government is open about listening to feedback from investors and concerned authorities. A conducive environment also boosted sentiment for Indian markets amid a dull global market scenario.

Bottoming out on technical charts

Besides the above fundamental triggers, Indian benchmark indices also seem to be bottoming out after a consolidation phase at 52-week low levels. The NIFTY50 consolidated between 22,300 and 23,100 levels for the previous five weeks and delivered a strong breakout of this range this week. The index rallied 2% in the previous week and surged over 2.6% in just two trading sessions this week. Similarly, the index also found support at the pivotal weekly 200 EMA levels near 22,450, indicating a revival in momentum near 52-week low levels. The weekly 200 EMA remains a major long-term trendline support, which was previously breached during the Covid-19 stock market crash.

Bottomline

The recent rally in the benchmark indices is driven by multiple tailwinds and is expected to sustain if the earnings momentum continues and FIIs turn more bullish towards Indian equities. Besides these, media reports also indicate a tweak in capital gains tax for equity investors could help boost the broader sentiment for Indian equities.

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