Has the recent market rally taken you by surprise?
You can blame ECB for it.
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From this data it is clear that the recent rally has been primarily driven by FII money.
FII & DII Trading Activity Provisional Figures, FII & DII Investment in India, FII/DII Trading Activity On Nse And Bse, DII & FII Buying and Selling Activities in BSE & NSE, Foriegn Institutional Investors, Domestic Institutional Investors
FIIs
bought Rs 9,469.14 crore worth of shares in January 2012 and till yesterday, have
bought Rs 9,469.14 crore worth of shares in Febuary 2012.
On the other hand DIIs
sold Rs 6,729.82 crore worth of shares in January 2012 and till yesterday, have
sold Rs 5,546.20 crore worth of shares in Febuary 2012.
Where did all this money suddenly come from?
Well, the answer is here:
ECB: Open market operations
On 21st December, the ECB injected 489 billion Euros into the European banking system.
Also the reserve ratio was halved from 2% to 1% and the minimum acceptable quality for collateral was reduced too.
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To conduct two longer-term refinancing operations (LTROs) with a maturity of 36 months and the option of early repayment after one year.
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To reduce the reserve ratio, which is currently 2%, to 1% as of the reserve maintenance period starting on 18 January 2012.
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To increase collateral availability by (i) reducing the rating threshold for certain asset-backed securities (ABS) and (ii) allowing national central banks (NCBs), as a temporary solution, to accept as collateral additional performing credit claims (i.e. bank loans) that satisfy specific eligibility criteria.
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ECB: ECB announces measures to support bank lending and money market activity
What this means is ECB lent half a trillion Euros to European banks at 1%.
The actual amount of new money injected into the system was lower at around 200 billion Euros.
Quote:
The ECB was already lending banks 515 billion euros before Wednesday but the new loans will not simply stack on top.
Banks switched 45.7 billion euros out of the one-year loans they took in October. They also scaled down their three-month borrowing from the ECB to 30 billion euros from 140 billion and almost halved their intake of one-week loans this week.
Analysts at Royal Bank of Scotland said the actual amount of new money going in to the system as a result of that juggling reduced the headline number to around 200 billion euros.
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Banks gorge on ECB loans, market cheer short-lived | Reuters
Some of this money found its way into riskier assets like emerging markets equities.
If we look at the charts of Nifty (or any other index), we can see that the current rally started exactly on the same day as ECB's LTRO (21st December).
A similar LTRO is scheduled for 29th February 2012.
How markets will react to this 2nd LTRO will depend on how much money is borrowed from this LTRO.
Two simplified articles to understand what ECB has done in December:
FT Alphaville » Q&A: The ECB
Q&A: ECB’s Special Measures Made Easy - The Euro Crisis - WSJ
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