Happy Diwali! India’s Sensex soars to record high

“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.

Happy Diwali!

[Image Credit]

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