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Sensex at 12000

Even by their recent standards the stock markets' performance last week has been noteworthy. The Sensex closed the week above 12,000, having crossed that milestone a day earlier. Such statistics are no doubt relevant to an understanding of the current stock market mood, which according to many experts, borders on euphoria. It is important to note that the recent movements of the Sensex and the Nifty have not always been in one direction. On April 13, the Sensex had closed at 11,237. Many believed at that time that a long overdue correction had set in. The Sensex is currently trading at a price-earning multiple of 21.82, above those prevailing in many emerging markets. Besides, the recent run up in the Sensex has been predominantly attributed to just three stocks — Reliance, Infosys, and Tata Steel. Although there is evidence of a broader rally emerging, it is the large-cap stocks that have attracted the maximum investor interest. Consolidation of recent stock market gains can take place only when the relatively smaller stocks — the mid-cap and the small-cap ones in stock market parlance — are more comprehensively covered by the rally.

Common sense suggests that new investors should be willing to take on extra risks and be prepared for more realistic returns, rather than the incredibly large ones that the markets have delivered recently. Already, there is a great deal of evidence that retail investors have chosen the more prudent route of investing through mutual funds. A few leading funds have mobilised record sums recently through their initial offers. Interestingly, it is they, rather than the still significant foreign institutional investors (FII), who have emerged as the largest category of investors in India recently. Investors of all categories have reasons for cheer. The healthy state of the macroeconomy, with a sustained growth rate of 8 per cent and above looking feasible, the RBI's positive outlook on growth and price stability, sound corporate earnings, and particularly impressive performance of the top three IT companies are facts that support the current optimism. International rating agency, Standard & Poor's, has upgraded the country's sovereign rating by a notch last week though it is still short of an investment grade, reflecting the assessment outside. Some new public offerings, especially Reliance Petro, have attracted record mobilisations, suggesting that the boom in the secondary market is extending to the primary markets. Inevitably there are a few dark spots too. Oil prices are at unprecedented levels, touching $74 a barrel last week. For the stock markets, the growing integration of the Indian economy with the outside world means that external shocks can no longer be cordoned off easily.

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