Market surges but uncertainties linger

The Sensex has made a phenomenal jump from its March lows of about 25,000 just after the Covid-induced lockdown was announced, to a landmark 50,000 last week. The Nifty too moved in tandem. Though profit-taking has shaved off some points since then, the near-doubling of the index is remarkable, especially its pace in its last leg when it gained 10,000 points in just 100 days. The rally was not narrow, and though it was led by large-cap companies, mid and small-cap stocks also performed. Foreign portfolio investors were at the forefront, bringing about Rs 2.40 lakh crore into the market. There was also large participation by domestic institutions and retail investors. About 10 million new demat accounts were opened last year. The market surge ensured that all participants got good returns for their investments in quick time.

There are many reasons, both global and local, for the extraordinary surge. The world and India are awash with liquidity which has found its way into the stock market, as returns from bank deposits and other savings instruments are low. There is optimism about the scale and pace of the economic recovery that has begun after the lockdown period. The Reserve Bank of India (RBI) has said that the worst is possibly behind us and the sense is that the economy can only go up from here. Many people made savings during the lockdown and later, and with not many avenues for spending money, routed it into the market. The rollout of the Covid vaccine has boosted the sentiment, and there are expectations of better corporate results for the third quarter and hopes for investment-friendly measures from the Union Budget. The leadership change in the US may also have been a factor.

But these are not adequate reasons for such a big surge. There are many features of a bubble in this runaway market, and it is not supported by fundamentals of the companies that form the Sensex. The stocks seem to have run far ahead of their true value. The economy is still weak and there are many uncertainties in the near and medium future. The anomaly is that while the economy is much smaller than its pre-Covid size, the Sensex is much higher than its pre-Covid levels. A slower than expected recovery, a worsening of the pandemic situation, an increase in US interest rates or any other adverse event can prick the bubble. Retail investors have to be specially cautious because they will be the worst hit by a market crash or even a downside. The Securities and Exchange Board of India (SEBI) should consider this and take steps to protect investor interests in an adverse situation.