“The markets seem to be very happy. More than anyone else, the markets seem to welcome the RBI (Reserve Bank of India) and government measures. But I would caution investors against excessive exuberance.”
That’s what India’s finance minister, P. Chidambaram, said on November 1, as the stock market hit an all-time high, according to a PTI report. The BSE Sensex, one of the two most widely tracked stock indices in the country, closed at a new high of 21,196.81, after climbing to 21,293.88 in intra-day trade, heralding the auspicious Diwali weekend on an extremely optimistic note.
A large chunk of the rally has been spurred by foreign investor purchases, which received an extra boost after the U.S. Federal Reserve voted to continue its $85-billion a month bond purchases, keeping global financial markets awash with cash. In addition, new central bank governor Dr Raghuram Rajan has also eased liquidity conditions, further expanding the ‘feel-good’ factor while convincing investors that he is serious about quelling inflation.
All in all, it’s a remarkable turnaround for a market that hit a year-low in August. But is it sustainable?
Unlikely. Most experts believe the market euphoria will be short-lived, given that it is being driven primarily by liquidity, not growth fundamentals. Economic growth is still sluggish even as inflation gives policy makers a continuing headache. In addition, the stock market rally has not been broad-based — for the most part, only stocks in which foreign investors have significant holdings have surged, according to a report in Times of India newspaper. Other stocks continue to languish at lower prices.
So Chidambaram has a point and investors should definitely exercise caution. For now, the Sensex has given investors a wonderful start to the festival season.