The focus of the market is now on the upcoming Budget and policy decisions.
The benchmark Sensex has gained more than 5,000 points since the announcement of the Lok Sabha election results on June 4 amid a rally in the broader market. On a monthly scale, the 30-share Sensex is up nearly 5% in June.
The Sensex extended the rally for the sixth consecutive day to trade at 77,475.08, up 137.48 points (0.18%), at 3:15 pm on Thursday.
This rally is being powered by the improvement in investor sentiment on expectations of political stability, policy continuity, solid economic growth, a healthy monsoon and easing inflation.
The volatility in the market around the poll results day was triggered by a sharp selloff by foreign institutional investors (FIIs).
According to data available with NSDL, FPIs sold Indian equities worth ₹25,586 crore in May. However, they invested in Indian debt and debt-VRR instruments during the month. So, the FPI net outflow was ₹12,911 crore last month.
The trend has reversed now. FPIs have invested about ₹12,873 crore in the stock market in June so far, indicating a positive outlook for the economy.
The focus of the market is now on the upcoming Budget and policy decisions. Even though there may be short-term volatility, experts are positive about the equity market for the medium to long term amid easing inflation, above-normal monsoon forecast and prospects of the start of the rate cut cycle by the end of the year.
There remain concerns over the premium valuation of the market. Sensex is now at a record-high level amid the absence of any fresh trigger. Currently, at 23.5, the index's price-to-earnings ratio (PE) is just slightly below its one-year average PE of 24.
The mid and smallcap segments are even hotter and many analysts see froth building in the space. The BSE Smallcap index is up 10%, while the BSE Midcap index has gained over 7% in June so far.
A lot will depend on what the government reveals in the Union Budget. The government is expected to keep its focus on fiscal consolidation and capital expenditure on infra, construction and manufacturing schemes which will give a boost to the economy and generate employment.
The upcoming earnings season and macroeconomic prints will also be closely observed as they will determine whether the current market valuation is justified or not.