Indian markets on Thursday recorded new highs with the Sensex consolidating above the 35,000-mark and the 50-share Nifty for the first time closing above 8,500. Banking shares led the gains for a second day, this time on hopes that the government would raise the foreign direct investment (FDI) ceiling for the sector to 100 per cent. A day earlier, they had jumped after the centre announced a cut in additional borrowing to Rs 200 billion.
After rallying as much as 425 points, the Sensex settled 178.5 points, or 0.5 per cent higher at 35,260, Nifty closed at 10,817, up 28.5 points or 0.26 per cent. The market came off from their highs as some investors booked profits judging recent gains as excessive, said experts. The broader market in fact saw widespread losses. The BSE Mid-and Small-cap indices fell 1.6 per cent and two per cent, respectively. Overall breadth of the market also remained negative with over three shares declining for every one advancing.
HDFC Bank, HDFC, Kotak Mahindra Bank and ICICI Bank contributed 186 points to Sensex's advance. All the four stocks gained between one per cent and 2.2 per cent on optimism that higher FDI will spur stock prices.
HDFC Bank crossed the landmark of Rs five trillion market capitalisation for the first time on Wednesday.
Banking shares have been in the forefront of the market rally last one year with the sectoral index for banks in the BSE rallying nearly 40 per cent in 2017.
Analysts expect this superior performance of banks especially the private sector ones to continue in the medium term.
"Private bank stocks have witnessed lot of traction in the recent past and the trend in expected to remain the same for few more quarters. The growth momentum in the private banks is higher and proportion of NPAs is also lower. The market share of private banks could continue to grow for the next three-four quarters as public sector lenders battle the NPA problem. However, on flip side valuations of private banks look expensive," said UR Bhat, managing director, Dalton Capital Advisors.
Foreign portfolio investors (FPIs) net purchased shares worth Rs 18.94 billion while domestic institutions sold shares worth Rs 6.6 billion, stock exchanges data showed.
Market participants expect the buoyancy in Indian markets to continue from a near-term perspective while policy measures which are going to be announced in the Union Budget for FY19 along with corporate earnings will decide market direction further.
"All the market indicators are looking positive and supportive. However if earnings revival doesn't come through, equities would be vulnerable for a correction. The corporate India is not yet near the turn in the business cycle, but that could change during 2018," said Sanctum Wealth Management in a note to investors.
However, performance of mid- and small-cap stocks remains a key concern for the Indian markets. Aggressive buying by mutual funds in the last few years has jacked up the demand for mid-cap and small-cap stocks. The broader market indices outperformed Sensex for the last four years straight. However, the valuations of the segment look stretched as both the mid-and small-cap indices are trading several notches above the usual price to earnings (P/E) multiples.
"Market strength is visible on the back of good start to third quarter results, but there is disconnect between index movement and stocks movement. Index is holding out well but there is weakness in the broad markets," said Hemang Jani, head - advisory, Sharekhan.