JOIN USThe country’s stock markets are near their historic highs after a period of drift and decline.
The BSE Sensex climbed back to its 2010 peak of 21000 on the strength of a sustained rally in the past few weeks. There is expectation that it might go further up as the sentiment is still bullish. But ironically there is no great reason to celebrate the performance of the indices. Stock markets normally reflect the strength of the economy.
But the economy is not in good shape and is battling serious problems ranging from inflation and high fiscal and CAD deficits to low investment. Corporate performance, which should guide stock market actions, has been consistently poor in the recent past and is still so. The GDP rate has been declining and there are predictions that it will go further down. The confidence in the political leadership is low and with elections approaching there is uncertainty also, which stock markets are always uncomfortable with.
But the market has ignored all these negative factors and made a sharp jump in a short period. This is because of the sudden inflow of funds from foreign institutional investors (FIIs). FIIs had made large withdrawals from the Indian market, as from other emerging markets, a few months ago when the US Federal Reserve indicated that it would start tapering its quantitative easing programme. But the Fed is now going slow on its plan and so the funds are returning to the Indian market. The recent recovery of the rupee also may have been a factor. This hot money is undependable and can go back any time. The Fed action has only been delayed. It will soon happen in any case and the outflow of foreign funds will then hit the markets again hard.
It may also be noted that the rise of the market was not widespread and comprehensive. Only selected sectors and shares, especially the large cap and index shares, were favoured by the foreign buyers. Midcap and smaller shares generally did not gain. This lopsidedness in fund flows is itself proof of a lack of conviction in the strength of the entire economy and of the fact that they are driven more by opportunistic considerations than by genuine investment reasons.
It should also be noted that domestic institutions have not contributed much to the rally. They are rightly sceptical about its sustainability. Small investors should also exercise caution lest they burn their hands.