Sentimental ride

The stock markets in the country are exuberant now and the Bombay Stock Exchange’s Sensex and the National Stock Exchange’s Nifty touched life-time highs this week.

They have since moved down from the top levels  but the underlying bullish trend is strong.

The rupee also has rallied from the lowest exchange values of last year and is ruling near a strong 60 plus rate against the dollar.

The strength of both the share and currency markets is the result of copious inflows of foreign funds which had last year moved out of the country.

This is against the general trend seen in other emerging countries which have seen their markets weakening because of continuous outflow of funds since the US Federal Reserve started reversing its monetary stimulus policy.
  
India is among the very few countries which have not been affected by this latest outflow.

The main and perhaps the only reason for the Indian rally is the hope of a new business and  industry-friendly government coming to power after the general elections.

There is expectation that the new government would adopt and implement decisive policies to end the state of  slide and inertia of the recent past and give a boost to economic development.

Regaining of momentum by a large economy like India’s is of consequence for financial institutions of the whole world, especially because there are fears of an economic slowdown in China.

Stock markets factor future possibilities and scenarios into present performance long before they become real.

So the present runaway performance of the markets is basically a political rally driven by sentiment. It should also be noted that the rally is not comprehensive and inclusive.

Though some indicators like the state of the current account deficit and inflation levels have improved, the economy is not on firm ground.

Interest rates are bound to rule high in the near future and investment prospects will remain weak.

Banks, which are the prime movers of credit for investment needs, are not in a good financial shape.
 It will take much time for even new policies to take effect and make a strong impact on economic growth.

Above all,  an electoral outcome different from the expectations that are fuelling the rally, can lead to a sudden and disastrous fall in the market.

So investors have to exercise caution over market movements now.