Sensex jumps over 3,000 points in 5 days; what is driving this market rally? Explained with 5 crucial reasons

Indian stock market benchmarks, the Sensex and the Nifty 50, continued trading in the positive territory for the fifth consecutive session on Friday, March 21, with financial stocks leading from the front.

The Sensex jumped 557 points, or 0.73 per cent, to close at 76,905.51, while the Nifty 50 logged a gain of 160 points, or 0.69 per cent, to settle at 23,350.40 on Friday.

In these five sessions, the Sensex has soared 3,077 points, and the Nifty has jumped over 4 per cent despite persisting global uncertainty.

Why is the Indian stock market rising?

Experts say the following five factors could be driving the recent recovery in the Indian stock market:

1. Intensity of foreign capital outflow receding

Signs of foreign portfolio investors (FPIs) slowly coming to the Indian stock market is a huge relief. This week, FPIs turned net buyers on two occasions in the cash segment. On March 18, they bought Indian equities wroth ₹1,463 crore and in the previous session on March 20, they bought equities worth ₹3,239 crore in the cash segment.

Heavy foreign capital outflow, due to stretched valuations of Indian stocks and weak earnings, has been the main reason for the domestic market to be under pressure since October last year.

"The main driver of the rally is the buying by FIIs in the cash market in two days and perhaps, more importantly, a sharp decline in their short positions and increase in long positions in the futures market. It appears that this has given confidence to retail investors who have resumed buying in the broader market, which is getting reflected in the smart rebound in the mid and small-cap indices," V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, observed.

2. Bottom fishing due to valuation comfort

After reaching a record high of 85,978.25 on September 27 last year, the Sensex entered a downward spiral, correcting by over 15 per cent, which pulled down its valuation.

The index's current price-to-earnings (PE) ratio stands at 21, below its two-year average of 23.6, signalling improved valuation comfort, particularly in large-cap stocks.

This has spurred fresh buying by investors, with experts suggesting that the current market conditions present a favourable opportunity to build a long-term portfolio.

"This is a good time to start building your portfolio with a bottom-up approach, focusing on large-cap and mid-cap stocks," said Jayesh Faria, Director and Regional Head – West at Motilal Oswal Private Wealth.

3. Growth picking pace

The recent macroeconomic prints have boosted investors' confidence that India's growth story's narrative has not lost momentum.

India's retail inflation eased to a seven-month low of 3.61 per cent in February. On the other hand, industrial output growth picked up in January after slowing down in the previous month. The Index of Industrial Production (IIP) grew by 5 per cent in January, up from 3.2 per cent in the previous month.

Fitch Ratings expects the Indian economy to grow at 6.5 per cent in the next financial year, finding India somewhat "insulated" from risks related to US trade policies.

4. Rate cut hopes

Expectations of further rate cuts by the US Federal Reserve and the Reserve Bank of India (RBI) are a key driver of the market rally.

While the US Federal Reserve did not change its policy rates in March, it signalled that two rate cuts could occur this year.

The RBI is likely to cut interest rates by 25 bps in April as retail inflation falling below its 4-6 per cent target range has presented it an opportunity to focus on supporting growth.

5. Expectations of earnings revival

After three modest quarters, expectations are high that India Inc.'s Q4FY25 earnings could be stable and may revive from Q1FY26.

"India's earning growth is likely at 12-14 per cent for the next 12 months and acceleration for 2027. Given that markets are forward-looking, we can expect a rally to begin about a quarter from now," Chakri Lokapriya, the CIO of Equities at LGT Wealth India, wrote for Mint.

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Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.