SENSEX SNUBS MACRO DATA, SHOOTS 475 PTS

FIIs Return In Droves; Index Above 12k

 INDIA'S industrial output recorded its sharpest fall in 16 years in March and exports fell for the seventh straight month in April, but that did not prevent the local stock market from rallying to a seven-month high on Tuesday, propelled by a surge in fund flows, as investors positioned themselves ahead of the election results this weekend.
    The 30-share BSE Sensex gained 4.07%, or 475 points, to close at 12158.03, while the 50-share Nifty ended 3.6% up at 3681.10 points. Banking and IT shares were the best performers, with the respective sectoral indices on the BSE gaining 5% each and the combined traded turnover on both exchanges was around Rs 74,000 crore, suggesting good participation.
    Government data showed a sharp 2.3% fall in the index of industrial production, dragged lower by a 3.3% drop in the manufacturing sector output, but the market appeared to have its focus firmly on the future, with analysts and economists predicting a recovery was imminent. In any case, they said the final numbers for the March output was likely to be revised upwards — the 1.2% contraction in February has already been upwardly revised to negative 0.7%.
    "The large contraction in the March IP can partly be explained by a high base, especially in the Capital Goods Index," Goldman Sachs said in a research note, adding an uptick was likely in April. "The excess liquidity in the system, a substantial easing of financial conditions and declines in some key interestrate spreads suggest that activity will pick up in the second half of FY10," Goldman economist Tushar Poddar said in the note.
    Indeed, excess liquidity in the system has been spoken as a major contributor to the recent rally. On Tuesday, there were talks that the surge may have been triggered by one hedge fund, which was said to be cutting its exposure to Taiwanese shares and redeploying the money in India.
    "Liquidity is the dominant factor at the moment; money waiting on the sidelines (foreign funds) is much higher than the cash level across domestic funds," said Sanjay Sinha, CEO of DBS Cholamandalam Asset Management. Poll results seen as next trigger for the market
FOREIGN funds bought Rs 452 crore worth of shares on a net basis on Tuesday, taking cumulative purchases for this month alone to Rs 3,276 crore, provisional data showed. Domestic mutual funds, which have until now stayed away from the rally, have joined in as well, buying Rs 177 crore on Tuesday and narrowing cumulative net sales for the month so far to Rs 137 crore.
    Market experts expect huge swings in stock prices over the next 10 days, as a lot of hedge fund "hot money" took cues from election results and the likely form, shape and expected stability of the new government.
    Should the election results disappoint by not throwing up a marketfriendly government, there could be a flight of money out of Indian equities. But, should the verdict be a positive surprise, funds that have stayed away so far would rush in to buy, not wanting to risk further underperformance.
    According to Mr Sinha, a key worry for the market would be the new government having to seek support from the Left to stay in power. Such a development could slow down the reforms process for a while, he said.
    Meanwhile, economists said they expected industrial output to move into positive territory from April onwards, although the same optimism is not shared for the export sector, which has been hit hard by a sharp contraction in global trade.
    Quick estimates for April 2009 showed a 33% drop in exports to $10.7 billion. And officials said that exports would stay in negative territory for the next five months due to lack of new orders and weighed down by a high-base effect.
    "Export growth is expected to be negative till September this year, as last fiscal, our exports were growing robust in the first half. The months of April, May and June will also not see many new orders coming in, as retailers would try to get rid of their piled-up stocks," commerce secretary GK Pillai told ET.

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