Why market rallied when all were thinking otherwise?

The stock market on Tuesday, December 11, went up by almost half per cent and BSE Sensex closed 700 points above from its day’s low. Even in Wednesday’s trading session, BSE Sensex was trading 1.1 per cent up from its previous closing and all the stocks in the indices were trading in the green. Such a rise was coming against the background of the RBI Governor resigning from his post a day earlier and the incumbent BJP losing three state assembly elections. The juxtaposition of both situations was supposed to spook the market; however, it went up against the general expectation.
 
There are a couple of reasons why investors are cheering both the outcomes. The departure of Urjit Patel from the apex bank of India and appointment of Shaktikanta Das raises hope among investors that he will be pro-growth and some of the restriction imposed by RBI on lending activities of few public sector banks (PSBs) may be waived-off. This is even reflected in stocks that saw the most appreciation in Tuesday’s trade. Share prices of some state-owned banks rose by more than 5 per cent on Tuesday. The liquidity crunch experienced by non-banking financial companies may be resolved and there will be a steady flow of liquidity to the sector. This is the reason shares of NBFCs traded higher. Shares of PSBs and NBFCs are helping the market gain.  
 
The other reason why the stock market is trading in green is that global markets are doing well. Despite the contention of many analysts and economists that we are decoupling from the global market, the fact remains that we are intertwined with the global markets and part of our performance can be explained by what is happening in the global market. On Tuesday, global markets were up by more than 1 per cent that aided the partial move in the Indian stock indices. Our analysis of monthly returns of S&P 500 (US Index) and BSE 500 (Indian Index) since 1999, shows that the return correlation has increased in the last one year.  The graph below shows a rolling monthly return correlation between both the indices.



 For the above reasons, an adverse outcome in three major state elections and the sudden resignation of RBI Governor did not have a material adverse impact on the stock market.