Indian stocks dropped, with the benchmark index paring a weekly gain, as concerns about equity valuations resurfaced after global funds extended their purchases of local assets.
The BSE Sensex fell 104.91 points or 0.36% to end at 28,668.22; Nifty fell 35.90 points or 0.40% to 8,831.55.
Foreigners bought $610mn of shares this week, the most since a similar period ended July 29, as global central bank stayed supportive of growth. They’ve bought $4bn of the nation’s equities this quarter, putting stock gauges on course for their first quarterly climb since March 2015.
The Sensex is valued at 16.4 times projected 12-month earnings, near the most expensive level since January 2011, after rebounding 25% from a low reached in February. A gauge for medium-sized companies trades at 33 times reported earnings, higher than the five-year mean of 21. The 12-month trailing price-earnings ratio for the S&P BSE SmallCap Index is a record 80.5 times.
“The concern on global liquidity has eased but the worry is on valuation,” Chokkalingam G, managing director at Mumbai-based Equinomics Research & Advisory, said by phone. “We’re advising clients to book profits in small- and mid-cap stocks, where valuations have become rich, and move into index stocks.”
Global stocks, bonds and commodities rose this week and the dollar weakened as the Federal Reserve scaled back its tightening plans and the Bank of Japan strengthened its commitment to reviving inflation. Indonesia cut rates for the fifth time this year, while New Zealand’s central bank signalled further easing. Lower borrowing costs in the US and other developed nations have bolstered demand for emerging-market assets.
Meanwhile the rupee completed its biggest weekly gain since July as foreign funds pumped money into local assets amid the Federal Reserve’s decision not to raise US interest rates.
Overseas funds have been buyers of rupee-denominated debt for a fourth straight week, while inflows into stocks are the biggest since the five days ended August 12. The Fed refrained from tightening this week, while the Bank of Japan reinforced optimism that it will keep in place measures to spur economic growth and inflation, boosting demand for emerging-market assets. Indian sovereign bonds also completed a weekly advance.
The rupee climbed 0.5%, the most since the five days ended July 1, to 66.6525 a dollar in Mumbai, prices from local banks compiled by Bloomberg show. The currency, which ended little changed yesterday, has jumped 1.3% since June 30, set for its first quarterly advance in six.
“The main driver for the currency this week is the Fed’s decision to not raise rates as that is going to keep demand intact for Indian assets,” said Gaurav Sharma, a senior currency analyst at Religare Commodities Ltd in Noida, near New Delhi. “We expect the rupee to rise to 66.50 per dollar by next week on the back of more inflows.”
The S&P BSE Sensex index of equities also rose this week, with an initial share sale by India’s biggest private-sector life insurer helping boost investor appetite. The Rs60.6bn ($909mn) initial public offering by ICICI Prudential Life Insurance Co drew orders of 10.5 times the amount of stock for sale, exchange data showed.
The yield on Indian government notes maturing in September 2026 slipped six basis points over five days to 6.80%, prices from the central bank’s trading system show. A pickup in monsoon rains eased concern over inflation, adding to the optimism for local bonds. The Reserve Bank of India next reviews monetary policy on October 4.