With benchmark indices gaining over 25 per cent so far this year, India’s financial market performance has witnessed a steady uptick.
Here’s a look at how financial markets fared:
Buoyant stock market
The stock market remained buoyant through the better part of September, backed by continued buying interest from foreign portfolio investors (FPIs) and mutual funds.
Both, the BSE sensex and the Nifty 50 scaled new highs through the first four weeks of September.
However, the market snapped its winning streak in the week ended October 1 as a sharp rise in crude oil prices, hardening US bond yields and Evergrande’s debt crisis in China started dampening investor sentiments towards emerging economies.
Despite witnessing a fall towards the fag-end of September, both sensex and Nifty’s performance in September was good, with returns ranging between 2.7 and 2.8 per cent.
The performance of the broader market in September was better than that of the benchmark indices which comprise a few large cap scrips.
The CMIE Overall Share Price Index (COSPI), which housed 3,101 scrips actively traded on the bourses, yielded 4 per cent returns in September, outperforming the sensex by 126 basis points and the Nifty by 116 basis points.
The top 10 per cent scrips by market capitalisation in the COSPI, which make the first decile, yielded the lowest returns of 3.7 per cent in September 2021.
Deciles 2 to decile 7 yielded returns in the range of 4.2 and 8.3 per cent, while the remaining three deciles, comprising the small-caps, yielded double-digit returns in the range of 10 to 20 per cent.
Among the sectoral indices, realty shined on the bourses yielding handsome returns of 30.6 per cent in September 2021.
The CMIE infrastructural construction index also yielded 12.3 per cent returns during the month.
The indices of contact-based services like hotels & tourism and recreational services posted strong gains in the range of 20 to 30 per cent post loosening of Covid-19 restrictions.
Consumer good companies, both durable and non-durable, also performed well on the bourses in light of improved consumer sentiments and expectations from the ensuing festive season.
Buoyed by rising crude oil prices, the CMIE crude oil & natural gas index and the CMIE refinery index posted smart gains of 24.3 per cent and 11.2 per cent, respectively, in September 2021.
The COSPI’s current valuation is very high at 41.9 times of its earnings multiple.
In comparison, the sensex and Nifty are trading at lower price-to-earnings multiple. Yet, these are quite high at 27 times and 30.8 times, respectively.
FPIs rush in
Elevated valuations of equities and hawkish tilt of global Central Bankers did not deter FPIs from pumping in more money into the capital market in September 2021. Their net investments in domestic equities and debt instruments topped $3.8 billion, the highest since December 2020.
FPIs picked up equities worth $1.8 billion in September 2021. Their interest was mainly in telecom, media, oil & gas and construction material scrips. FPI’s aversion towards banking and automobile stocks continued for the third consecutive month.
FPI investments in debt touched a 30-month high of $1,742 billion in September 2021. A bulk of this investment flew into sovereign bonds. Besides, they brought in $75 million through debt-VRR and $168 million through hybrid securities.
Mutual funds invested $2.4 billion into the capital market in September 2021. Of this, $1.5 billion went towards debt instrument purchases and $912 million went into equities.
Dollar strength weighs on rupee
The rupee averaged Rs 73.54 per US dollar in September 2021 as against Rs 74.18 per US dollar in August 2021.
Although the average monthly value of the rupee appreciated by 0.86 per cent against the US dollar, its intra-month movement shows a steady depreciation in its value against the greenback through September.
In the first six days of September, the rupee strengthened against the greenback as the latter depreciated against most currencies.
The US dollar index (DXY) fell from 92.63 on August 31, 2021 to 92.04 by September 6, 2021. The greenback gained strength thereafter.
The DXY rose steadily from 92.04 on September 6, 2021 to 94.23 by September 30, 2021. The rupee weakened against the US dollar during the same period from 73.06 to 74.26.
The rupee appreciated against the European currencies through September. It averaged Rs 101.15 per Sterling Pound as compared to Rs 102.40 per Sterling Pound in August 2021.
Similarly, it appreciated against the Euro to Rs 86.64 per Euro in September from Rs 87.35 per Euro in August.
Oil heats up
Oil prices resumed their northward journey in September after a brief pause in August.
Price of the Indian basket of crude oil averaged $73 per barrel during the month as compared to $70.1 per barrel in August 2021. This is the second highest monthly level at which oil has traded in the last three years.
Prices rose through the month from $70.7 per barrel to $76.7 per barrel despite Opec hiking its output to the highest level since April 2020.
Opec pumped 27.31 million barrels per day (bpd) oil in September, 420,000 bpd higher than in August. On the other hand, demand for oil increased in September 2021 globally due to power shortages.
Crude oil prices are expected to remain elevated for some time as Opec, Russia and their allies, known as Opec+, have decided to stick to their plan of a moderate increase in oil production of 400,000 bpd till November 2021. Besides, the recent sharp increase in natural gas prices could also spill over into the oil market.
Gold prices averaged at $1,777 per troy ounce in September 2021 from Rs 1,784 per troy ounce in August 2021. This is the fourth consecutive month when gold prices have softened.
The weakness in gold prices can be attributed to the strengthening of the US dollar which makes the yellow metal costly in other currencies, thereby affecting its demand.
Yields firm up
G-sec yields softened through most part of September, but the trend reversed in the last eight days of the month as bond prices fell on fears of rise in inflation as crude oil prices flared up in the international market.
Weighted average yield on G-sec with 10-year residual maturity eased from 6.22 per cent on the last day of August to 6.12 per cent by September 22, only to rise again to 6.21 per cent by September 30. Short-term and medium-term yields mimicked the trend.
Weighted average yield on G-sec with 1-year residual maturity fell from 3.84 per cent to 3.61 per cent and rose again to 4.03 per cent on a similar comparison, while weighted average yield on G-sec with 5-year residual maturity fell from 5.65 per cent to 5.58 per cent and rose to 5.66 per cent.
Weighted average call money rate (WACR) increased to 3.37 per cent by September 30, 2021 from 3.18 per cent at the end of August 2021. This is the first time in the current fiscal that WACR has risen above the reverse repo rate of 3.35 per cent. It was lingering well below the reverse repo rate as excess liquidity was available in the market.
The RBI in its August 2021 monetary policy review had decided to go aggressive on conducting fortnightly variable rate reverse repo (VRRR) auctions to absorb excess liquidity which seems to have helped call rate rise in September.
The RBI is conducting its fourth monetary policy review for 2021-22 during October 6-8, 2021. Most economists are expecting the Monetary Policy Committee (MPC) to hold the rates and maintain ‘accommodative’ stance despite a spike in crude oil prices.
(The author is an Economist at Centre for Monitoring Indian Economy.)