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Treading cautiously

Amidst the record breaking run of the benchmark indices, the Sensex and the Nifty, it is easy to downplay or even ignore the extreme volatility that has gripped the share markets. Volatility in stock prices is not new to the domestic markets and, within limits, is only to be expected. However, as was seen spectacularly on Wednesday, the Sensex gyrated by as many as 665 points during one trading day. The huge intraday volatility, rather than its record breaking closing on that day — just 150 points short of 18,000 — reflects what has become the defining characteristic of the stock markets in recent weeks. Yet if investor attention is glued to the virtually one-way, upward movement of the Sensex and the Nifty, there are reasons for it. The Sensex had risen by 1,000 points to touch 17,000 in just five trading sessions. The more broad-based Nifty took 23 sessions to reach 5,000. Until Wednesday, the Sensex has been scaling new highs every day for 10 days in a row. From a level of 15,669 on September 18, it climbed to 17,847 points on October 3, a 14 per cent gain. On Thursday, the indices slipped slightly but continued their upward momentum during most of Friday. The Sensex almost touched 18,000 but closed sharply lower at 17,723. Over the week, the Sensex gained 2.5 per cent and the Nifty 3 per cent.

Indian stocks are currently among the most highly priced in the emerging markets category. Attracted by the strong macroeconomic fundamentals and robust corporate earnings, foreign institutional investors have been pouring money into Indian stocks. In September alone, the net FII investments were of the order of $4.7 billion. Spurred by the cut in the interest rates in the United States and the weakening dollar, large investors have been looking to the emerging markets for higher returns. In India the strong rally is liquidity driven. The turnover in stocks has been very high. However, the rally has not been broad-based. It would be facile to think that the stock prices will always be moving up even over the near term. The external as well as the domestic factors that favoured Indian stock markets may not endure for long. The U.S. sub-prime crisis might become worse and lead to a recession. In India too, there have been a few signals suggesting a slight slowing down of the economy. Retail investors would do well to heed the advice of Union Finance Minister P. Chidambaram, among others, to be careful with their investment strategies and to judiciously take the mutual funds route.

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