The strong market rally has to be seen in the context of some FII selling since the start of August, resulting in a total outflow of Rs 236 crore (from equity sales) for August (until Monday, August 23). But this exit is of little consequence and has to be viewed in the overall context of inflows since April this year, when FIIs brought in a total of Rs 3,000 crore.

FIIs have been among the big gainers, having bought right from the start of the recovery late last year. With a strong surge in prices, it is but natural that these funds will book profits. Secondly, the India weightage has been reduced in the Morgan Stanley Country Index, which is the portfolio benchmark for foreign fund managers, and could have prompted some of the selling as well. Even thoughthe FIIs are not entirely out of the market, it is quite likely that the really big jump in FII buying will come only after the election results are known.

On the other hand, there is a lot of exuberance in the markets, with the return of the retail investor. Besides, to a large extent, the gap left by FIIs has been bridged by strong retail inflows in various domestic mutual funds in the first quarter of the current financial year. A number of retail investors have chosen the mutual fund route to gain exposure in a rising market.

Numerous stocks in the BSE's B group have hit yearly highs, and many have hit two, three and five year highs. This exuberance can also be seen from the huge increase in outstanding positions in the market with long positions exceeding short positions by a large margin. But this, in itself, is not a bad or worrisome development, as long as the badla rates remain under control. Despite a brief spike to 24 per cent, badla rates have settled to around 20 per cent, reflecting acomfortable level of funds to carryforward positions. Market analysts have pointed out that the jump in outstandings is partly a result of the increase in the clearing rate (reflecting the price rise week on week) rather than any extraordinarily large increase in speculative volumes.

The recovery, especially the volume growth, seen in numerous industry segments will lead to a major jump in earnings and profits in the second quarter. This growth had just begun to materialise in the first quarter. And the market has begun to discount this eventuality.

But at this point, a correction in the stock indices would be a healthy development for the market in general. But one reason to curtail the celebrations is the consistently rising international price of crude oil, which is presently at $21 per barrel. There will be a corresponding effect both on the currency, the government's fiscal deficit as well as on inflation and interest rates. The dip in inflation seems to have bottomed out and has begun to rise fromlast week. Further, since inflation is measured through the WPI, any increase here will mean higher prices of intermediate goods and consequently, higher input cost to companies. This cannot be a conducive development for sustaining the bull run.