The stock indices are showing a strong upturn despite all kinds of economic woes — inflation and inflation expectations are on the higher side, fiscal deficit could slip from its target while the current account deficit may be improving but still remains much above the comfort level of the Reserve Bank of India (RBI).
However, the stock market’s benchmark index, Bombay Stock Exchange (BSE) 30-share Sensex surged by 358.73 points to 20, 929.01 on a day (last Tuesday) the RBI hiked the repo rate (the indicative policy rate) by 25 basis points. It is unusual for stock markets to rise when the central bank hikes rates.
When the markets ended for the week on Friday, to usher Samvat 2070, the Sensex surged to an all time high of 21,196.81 at the close.
It also touched an intra-day high of 21,293.88 surpassing its previous all time high of 21,206.77 on January 10, 2008. From its yearly low of 17,448.71 on August 28 (intra-day), the Sensex gained 3,845.17 points. This was the day that the rupee also touched its historical low of 68.85 per dollar.
The rise in stock prices shows that there is lot of liquidity in the system. Developed economies are pumping lot of money into the system to spur their economic growth, and a huge portion of these funds are reaching the emerging economies pushing up stock prices, including India.
“The Dalal Street would be celebrating Deepavali in the real sense as Sensex has crossed the previous high, even though the fundamentals are not looking very rosy. This may be due to the Rajan-effect combined with the continuation of the purchase of bonds by the U.S. Federal Reserve,” said V.R. Srinivasan, Director, Brics Securities. However, a majority of the investors are still cautious given the forthcoming general elections, Mr. Srinivasan added. Hopefully the Government is expected to announce further reforms till the election code of conduct comes into effect.Thankfully, the monsoon has been very good all over India and therefore there will not be any negative surprise on the agricultural front. This was also confirmed by the RBI Governor Raghuram Rajan, when he announced the second quarter review of monetary policy last Tuesday. But supply chain still poses difficulties, pushing the food prices high, and the Government is unable to control inflation.
In short, the markets depend on further reforms and the benevolence of the US Federal Reserve in continuing its operation of bond buying. At the corporate level, the core sector is not showing any promise, and the non-performing assets (NPAs) are rising. This has increased the stress for the banking system as a whole. This also reflected in the Sensex in the last four years wherein most of the companies in the core sector have given negative returns. The best performers were all from the non-core sectors.
The moot question is that whether this rally is sustainable? There is fear in the market — based on the earlier experiences — that whenever Sensex crossed 21,000-mark, on both occasions, it fell sharply.
