No one has exactly fathomed why the FII sell off happened in August. If one were only to find an empirical co-relation, the trend changed once it was clear that Fed was not going to increase the interest rate. Indian traders were quick on the trigger once the tide turned. Volumes had been built up starting August 31. This lobbed the index up a perch. But then came the second booster from September 7. The build up trading volumes is mind boggling.

The punters were in full blast into their speculative games. And they had a reason that they could use. Vajpayee's visit to the US was expected to improve the market sentiments. The markets, as pundits would tell you get driven more by sentiments than any reasoned assessment.

The Prime Minister's visit was expected to bring in $ 15 billion. An analyst would find it difficult to convince himself that the Prime Minister's visit by itself had the power to bring about this change. It is common knowledge that the government has been wooing foreign funds for quite some time. The wooing has been not only for FDI but even for portfolio investments. The hurry with which it did crisis management when FIIs voted on their feet against the tax status issue made that amply clear.

But it would take quite a while to pump up the FDI flow, which has slowed down. All one can be happy about is that the government has serious intention to woo FDIs. The continued attempts to improve the funding formulae for electricity projects is an indication of how serious the government is.

While these measures aim to shore up the long term outlook, in the short term there were other considerations, which fund managers would have had to digest. Sensex had risen considerably in the last three months. Any further movement upwards does not look easy, if one were only to draw up the balance sheet for the economy at this point of time. The only thing that could change that status was liquidity of FII inflow. The news that the FII portfolio flow to the region has gone up by around 14 per cent could gladden your heart, but that should not make you blind to the actual dynamics one is currently witnessing in the Indian market.

A lot of churning is taking place out there, not so much of investment. Get out of tech stocks only to log into pharma and FMCG. And once you have ridden the profit wave, you jump on to the other ride. You can repeat this musical rides any number of times. And a large community of traders who have made it their full time business to wrangle whatever profit they can from the market could not care less. To them is just a case of perfecting one's techniques and finding out what is the flavour for the next three days or a fortnight perhaps.

All this however leads to a sense of exuberance. And exuberance could blind the majority of the traders to reality and prompts them to take risks, where prudence should have been deliberate choice. The risk in the market today is considerable if you take a look at the volume growth in the last fortnight.This is a bubble which can burst with crippling damage to average investors. And perhaps to many traders, who play not by research but by market mood and blind beliefs.

The Prime Minister will soon be back and Bill Gates has gone back. What is threatening on the horizon is the possibility of the government raising petroleum product prices.

If that takes place, the speculative bubble will collapse. May be the government should seriously consider covering the oil pool deficit by deficit financing rather than passing it on to the industry and the public. That would be both economic and public justice.

But the last word on raising of petroleum product prices has not been said. And the government would do well to consider all the options before it. Certainly the industry is no shape to take a blow at this juncture. The growth rate in the Index of Industrial Production has been going down steadily in the last four months since April.

The drop in electricity generation too adds to the worry. This has declined from 4.9 per cent in April-July 1999 to 4 per cent in April-July 2000. It has been seen earlier that the impact of a slow down in electricity generation gets reflected in the economy with a lag effect. If these concerns are not enough, the import of capital goods and production has recorded a negative growth of 0.3 per cent in April-July 2000, in contrast to a 11.6 growth in the same period last year.

The economy has been facing reducing investment by the government for quite some years. There is not enough capital formation to ensure the long term health of the economy in the public domain. However, recent studies suggest that private investment could substitute investment by the government sector, in compensation and save the economy from a slow down in growth. But even if one went by that argument, the recent slowdown in import and production of capital goods is a clear warning signal that capital formation in totality is not going up.

It is only on the export front that one can see some warmth. But if export earnings has been up 26 per cent in the April-July, the credit is due to the upward cycle of recovery in the region as well as in commodities.

Nothing has changed in the intrinsic export competitiveness of the Indian industry. Amidst such a confusing scenario, some traders might entertain fond hopes in the tax collection figures as reflecting that all is healthy But take a hard look and you will find that the indirect tax revenues have risen by only 11.7 per cent in the period. Nor should you end up giving high a weightage to the fact that the offtake of commercial credit is good and the stock trader could place his bet on this factor. Credit has gone into possibly exploiting capacities to the full, and certainly not for making capital investments.