24 Jan 2018 19:24 IST

What pushed the Sensex from 34K to 36K

While a weak dollar increased FPI equity inflows, IT and banking sector stocks buoyed the index too

The Indian equity market has started off with a bang in 2018. The Indian benchmark index, Sensex, touched a new high of 34,000 in the last week of 2017 ending on December 26. After hovering around this psychological level of 34,000 all through the week, the index ended the year at 34,056. But as the New Year began, the Sensex gained momentum, reaching another milestone in just less than four weeks by touching 36,000 on January 23.

Apart from the domestic factors, another major trigger for this strong surge in the indices is the weak dollar. The US dollar index has slumped over 3 per cent, from 93 to 90 levels, since the last week of December.

Stock markets in emerging economies such as India perform well when the dollar weakens. India’s Sensex has surged 6 per cent while Russia’s RTSI and China’s Shanghai Composite Index have surged 11 per cent and 7 per cent this calendar.

This is because foreign money inflows into emerging economies increase when the dollar weakens. Foreign Portfolio Investors (FPIs) have poured $1.9 billion into the Indian equity segment from December 26, 2017.

High dollar returns

Weakness in the US dollar increases the returns made by foreign institutions in dollar terms. Even as the Sensex gained 6 per cent in the rally from 34,000 to 36,000 now, the Dollex 30 Index, which gives the return in dollar terms, has risen over 7 per cent in the same period.

Here is an example that shows how a weak dollar gives a higher return. Say, the value of rupee is 50 per dollar and a foreign investor wants to invest $100 in the Indian market. When she exchanges the currency she will get ₹5,000 (50*100), which can be invested in India. Say she purchases 100 shares of a company at ₹50 per share. Consider the share price going up to ₹60 over a period of time and the rupee strengthens to 40 (from 50 at the time of purchase). If the foreign investor sells the stock now she will get ₹6,000 (₹60*100 shares) and, when she converts the same to dollars, she will get $150 (6,000/40). In this case the returns earned in terms of dollar (50 per cent) is much higher than the returns given by the stock in terms of rupees (20 per cent).

The movers

What has moved the Sensex so sharply by about 6 per cent from 34,000 to 36,000 in a short span of time? Here’s a look.

Stocks from the information technology (IT) and banking and financial services sectors were the major movers among the Sensex 30 stocks in the index’s journey from 34,000 to 36,000. Tata Consultancy Services (TCS) and Infosys are the top two companies that have rallied the most. These stocks were up 17 per cent and 14 per cent respectively during this period. This was followed by ICICI Bank and Axis Bank, up 14 per cent and 12 per cent respectively.

Telecom and auto sectors failed to participate in this rally. Bharti Airtel slumped 10 per cent during the rally. Among auto companies, all the stocks in Sensex 30, barring Mahindra and Mahindra (M&M), were beaten down during this period. Bajaj Auto, Maruti Suzuki, Tata Motors and Hero Motocorp were down between 1 and 5 per cent. M&M, the sole winner among the auto stocks, rose about 4 per cent.

Sector performance

Among the sectoral indices, the BSE IT index tops the chart with an over 13 per cent return as the Sensex rallied from 34,000 to 36,0000. The BSE Capital Goods, BSE Metals and BSE Bankex indices are up over 7 per cent each.

Among the laggards, the oil and gas and auto indices underperformed during this period. Although, Sensex 30 stocks such as ONGC and Reliance Industries were up 7 per cent and 6 per cent respectively, the sector as a whole has been in the negative, and the BSE Oil index is down 1.8 per cent.