Devender Singh invested in India’s volatile stock markets for the first time last year after watching a friend make a mint. The markets promptly fell 30 per cent.

But Mr Singh, who runs a travel company that leads tours to New York, did not panic. He waited, and a few months later, his investments were up 10 percent. “You’ve got to have patience,” he said.

Of course, he also stopped taking all of his friend’s advice. For now, India’s markets are on a roll, surpassing even the rosiest forecasts, in part because of a young, wealthy, expanding middle class that is banking on India’s aggressive corporate growth. Indian indexes have hit new highs, drawing in foreign investors and Wall Street banks.

Many Indian companies are looking to take advantage of the fervour. Last week, the country’s largest public offering came to the market, the $2.4 billion float of the real estate company DLF. Despite a history strewn with lawsuits, fears of a property bubble and a prospectus that lists 76 risks, DLF was oversubscribed.

This month, India’s ICICI Bank plans to tap markets in India and the United States for $5 billion. Stock offerings in 2007 will shortly reach $10 billion, in part because of a new issue from Tata Steel, which is raising money to finance the acquisition of a rival, the Corus Group.

Influencing factors

The frothy share prices and large initial offerings are intensifying a debate in India. Market bulls say a fundamental shift is under way as consumers tie their personal wealth more closely to India Inc, paving the way for a more prosperous middle class.

“There has been a sea change in the way people are approaching savings and investments,” said Sanjay Prakash, Head of HSBC’s Mutual Fund business in India. In the last five years, he said, a lot of people became very rich.

But bears have begun to talk about a bubble fed by naive optimism and day trading. Indian investors have forgotten, critics say, the heavy losses they suffered after fraud depressed the markets in the early 1990s and the technology bubble burst a few years ago.

“It’s a bubble to the extent that we lack depth and breadth in the market,” said Prithvi Haldea, a founder and Managing Director of  Prime Database-based in New Delhi, which tracks issues and trends in the markets.

About three-quarters of the daily volume comes from day trading, he said. “It’s more of a casino,” he said. If you ask those traders what they know about a stock, “They can’t answer you,” Mr Haldea said.

While the argument intensifies, the recent growth and volatility are undeniable. The Bombay Stock Exchange’s Sensex Index has passed what was seen as the psychologically crucial 14,000 mark and many traders expect it to hit 15,000 this year.

In the 12 months ended June 8, India’s market indexes have risen 45.6 per cent, HSBC said. In addition, the amount of household savings invested in the equities and mutual funds has risen to about 5 per cent from about 1 per cent four years ago.

BSE market cap

In May, the market cap of companies on the Bombay Stock Exchange crossed $one trillion, putting India in the second position next  to China among the emerging and developing markets. But in recent weeks, the Sensex Index has yo-yo’ed, dropping as much as 1 per cent in a day.

Stock watch

Stock watching has become an obsession in India, one that rivals cricket and Bollywood. India has three national business television news channels and another in the planning, four national daily business newspapers and dozens of business magazines.

In a national  daily newspaper that claims 14 million readers, the “World News” is tucked behind the business section. Believing in India’s stock markets means believing in India itself - and the country’s ability to transform its combination of young population, dilapidated infrastructure, chaotic streets and unbridled optimism into a corporate superpower.

The market is “fundamentally going to rise,” said D K Malhotra, a 46-year-old bank manager whose household has about 50 per cent of its savings in the markets.

Sureha, his wife, a 41-year-old homemaker, does the trading, he said, and makes her own decisions. The Malhotras have put all their investments in blue chips, companies like Reliance Industries and Maruti. “This is not a fad,” Mr Malhotra said. “We sleep quiet at night. No problem.”

Even Bollywood has joined in. “Guru,” a 2007 film about an Indian villager turned business tycoon, neatly sums up the ethos of the time. At a pivotal point, a taxi driver tells the Chief Executive and the hero of the film, “I got my three daughters married” thanks to your stock shares.

At the close of the film, the hero promises to make India’s largest company a global powerhouse, yelling to a stadium of gleeful shareholders, “Tell the world we are coming.” 

In the Delhi headquarters of Angel Broking, young male traders pack into computer-lined rooms that are frostily chilled against the heat outdoors. The brokerage house, which has 76 branches, has 220,000 clients and is growing 30 per cent a year.

“The risk appetite here is greater than in developed countries,” said Dinesh Thakkar,  founder of the brokerage firm, which is soliciting bids for a foreign partner. “If you’ve already got wealth, you don’t want to take risks,” he said, “But if you’re aspiring to be wealthy, you’re willing to do so.”

Young investors
 
Younger investors, he said, are more willing to take risks than previous generations, and they understand the products. Investors, in general, he said, are financially savvy because many of them have run or have grown up around small businesses. Even mutual funds, which have had a difficult time attracting assets in India, are growing.

While Mr Haldea of Prime Database has expressed concern about day traders, he acknowledges that his son is active in those very markets. “He’s earning tons of money and is willing to put it into the capital markets,” Mr Haldea said. “With a growing population, there are new suckers every year.” Most Indian investors, though, are expressing nothing but optimism.

Indian corporations are “buying companies bigger than themselves, and have confidence,” said Raman Verma, a trader who started with family money and now trades for several clients. “In two or three years, the market may be saturated, but currently it is booming,” Mr Verma said.