Are rising stocks of small and mid-cap Indians shares a sign of overheating?


The rally in Indian equities has swelled the market’s total valuation by $775 billion in a little more than five months (ANI)

The rupee depreciates settles 9 paise lower at its lifetime low of 83.22 against the US dollar on Thursday amid a firm American currency and elevated crude oil prices

Our Bureau
Mumbai/New York

In a major boost to Indian economy, the equity benchmark Sensex climbed over 385 points to reclaim the 66,000-mark on Thursday, propelled by robust buying in index majors HDFC Bank, L&T and SBI amid a weak trend in global equities. A decline in crude oil prices in the international market also supported the domestic equities, traders said.

Rising for the fifth straight day, the BSE Sensex recovered all the early lost ground and finally closed with a gain of 385.04 points or 0.58 per cent at 66,265.56. During the day, it hit a low of 65,672.34 and a high of 66,296.90. The Nifty advanced 116 points or 0.59 per cent to settle at 19,727.05.

But the rally in Indian equities that has swelled the market’s total valuation by $775 billion in a little more than five months has been accompanied by a notable shift in investor preference to smaller stocks. That poses risks as gauges of small and mid-cap shares show signs of overheating, and as the domestic economic outlook becomes more clouded ahead of national elections next year.

Smaller companies are seen benefiting more from the ongoing recovery in India’s capital expenditure. Larger stocks, in contrast, have been relatively restrained by worry over the impact of a possible global recession on the nation’s major IT firms, according to a Bloomberg report.

The trend is the opposite to what has been seen in the US stock market, which has been driven by a handful of technology megacaps surging on the boom in artificial intelligence, leaving small caps in the dust.

The Nifty Midcap 100 Index has risen 37% from a March low, compared with a 16% gain in the blue-chip NSE Nifty 50 Index, driving the ratio of the former to the latter to an all-time high. The previous such peak in early 2018 was followed by a drop of about 25% in the midcap gauge over the next nine months, according to data compiled by Bloomberg.

Investors are still looking to bet on one of the world’s fastest growing economies, driving the Southeast Asian nation’s equity benchmarks to a series of record highs over the past two decades. And the shift in leadership away from the biggest names has been fueled by a flood of funds from retail investors, indicating broader participation in the market.

Still, the pace of gains in smaller stocks relative to large caps has raised caution about the near-term outlook for the latest uptrend in Indian stocks.

In a worrisome trend, the rupee depreciated for the fourth straight day and settled 9 paise lower at its lifetime low of 83.22 (provisional) against the US dollar on Thursday amid a firm American currency and elevated crude oil prices.

Positive trend in the domestic equity markets, however, provided a cushion to the rupee, according to forex traders.

Crude oil breached the USD 90 per barrel-mark after oil producing countries agreed to extend supply cut till December this year while dollar stayed firm on safe-haven demand.At the interbank foreign exchange, the domestic unit opened at 83.15 against the dollar and traded in the range of 83.12 to 83.22 against the greenback. It ended at the lowest level of 83.22 (provisional) against the dollar, registering a fall of 9 paise from its previous close.

On Wednesday, the rupee settled 9 paise lower at 83.13 against the dollar. Earlier, the Indian currency had closed at the same level of 83.13 on August 21.

The domestic unit has declined 60 paise since Monday when it had closed 9 paise lower at 82.71 against the greenback. On Tuesday, the unit had plunged 33 paise, the sharpest fall this week.

“We expect rupee to trade with a negative bias on strong dollar and elevated crude oil prices. Disappointing European data may further support dollar. Rising US treasury yields and concerns over global economic growth may also weigh on rupee,” Anuj Choudhary – Research Analyst at Sharekhan by BNP Paribas, said.

Meanwhile, the dollar index, which gauges the greenback’s strength against a basket of six currencies, rose by 0.09 per cent to 104.95. Brent crude futures, the global oil benchmark, was trading 0.39 per cent lower at USD 90.25 per barrel.

On the domestic equity market front, the BSE Sensex closed 385.04 points or 0.58 per cent higher at 66,265.56 points while the broader Nifty jumped 116 points or 0.59 per cent to end at 19,727.05 points.

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