IT MAY appear that above a certain point, inflation is actually a good thing for the stock market. Even as wholesale price index-based (WPI) inflation climbed to a three-and-a-half year high of 7.57%, equity indices rose over 1% on Friday, and are now up 3% in the week.
The view on the Street remains divided, but bulls are convinced the market could ride the present momentum for a few more days.
There is near unanimity in the view that largecap stocks stand a better chance of doing well, compared to mid and smallcap shares.
The 30-share BSE Sensex advanced 312.81 points, or 1.8%, to close at 17,600.12 while the broader 50-share S&P CNX Nifty rose 62.30 points, or 1.2%, to end the week at 5,228.20.
“With a feeling that the dollar may have bottomed out and commodities may be heading for a correction, the short-term outlook on equities is bright,” says Standard Chartered STCI Capital head of equities Milind Pradhan. “There is strong buying from funds and insurance companies in select large cap heavyweights, and thanks to the low volumes, it’s showing up as sharp movement in the indices,” he added.
Mr Pradhan’s comments should be seen in context of global equities rallying consistently over the past few sessions. Even on Friday, stocks rose in Europe and Asia, pushing the MSCI World Index to a threemonth high, as investors are betting that the turmoil in financial markets may be fast subsiding. In sectorwise trends, bank stocks were among best performers, with the BSE Bankex gaining close to 4%. The belief is that with interest rates unlikely to rise near term, demand for credit may not be affected. Auto shares too posted handsome gains, as players are hoping that demand will automobiles will pick up as interest rates stabilise. Metal, healthcare and fast moving consumer goods shares were among the key laggards.
Elsewhere in the US, employers cut fewer jobs than economists had forecast in April, boosting optimism that the labour market will weather an economic slowdown. The jobless rate fell to 5% from 5.1% in March. The Federal Reserve also expanded its cash- loan auctions for banks by 50% to $75bn each thus lowering borrowing costs, further enhancing the bullish sentiment.