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The Nifty 50 has surged by 9.50% and the Sensex has advanced 9.17% in the past month, especially after a strong rally in the past week. Benchmark Indices closed at their highest levels since April 2022. At this point, market participants wonder if the bear phase is over for Indian equities.

Analysts said that the markets shot up in July on the back of a combination of reasons. FIIs bought shares, the quarterly earnings were healthy for many companies and there were expectations that the US Fed might temper its aggressive interest rate hikes boosting investor sentiment.

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Foreign investors have turned net buyers in the past month with an investment of nearly ₹1,100 crores in the Indian equity market and their selling spree seems to have taken a breather. This came after they had pulled out ₹ 50,145 crores from Indian equities in June, which was the highest since March 2020 when they had pulled out ₹ 61,973 crores, as per data available with depositories.

The US Fed and the Reserve Bank of India have hiked policy rates by 175bps and 90bps in H1 2022 respectively, to curb record-high inflation. This pivot by central banks accompanied by a surge in bond yields has driven significant volatility in the risky assets.

This situation is similar to the ones faced in 2004 and 2011. The markets seem to be in a mid-cycle transition. At this point, the volatility rises and equity returns are more modest, mirroring earnings growth.

Analysts say that the macro-economic environment and the earnings trajectory in the second half of this year will determine if this mid-cycle transition is successful like in 2004 – where markets recovered after the initial fall to hit a new all-time high over the next 6 months – or unsuccessful like in 2011 – with equity markets entering a 3-year long bear phase.

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They added that India’s India’s economic and earnings growth remains much ahead of its major peers. These macro-economic conditions are similar to the 2004 mid-cycle. However, inflation and bond yields are higher as compared to 2004, and this indicates a possibility of policy tightening.  Nevertheless, the macro-environment in India is much better than in 2011.

Written by Simran Bafna

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