The Sensex is nudging the 18,000 mark and at 17,876, trades at over 16 times forward earnings. So India is now the most expensive market in the region. Indeed, the Sensex has gained 11.6% from the recent low of 16,022, seen on May 25, 2010, and looks set to hit the 17,970 levels seen in the first week of April. That?s despite the fact that valuations are now clearly at a premium to the historic average. The reason why foreign investors have been so bullish on India is because the demand for goods and services is driven primarily by domestic demand and a young, earning and aspiring population otherwise dubbed the demographic dividend, is expected to keep manufacturers of cars, two wheelers, consumer goods and consequently makers of other products too, busy. This together with the capital investment in sectors such as power is expected to fuel GDP growth of 8% and hold it there.

Now the story, in China, could be somewhat similar. Experts point out that with China signalling an end of the yuan?s fixed rate to the dollar, there may be a shift towards domestic demand as the prime driver of growth; after all, a stronger yuan will boost the purchasing power of China?s households. According to Bloomberg, the People?s Bank of China said in a statement that a more flexible currency will ?direct resources to domestic-demand sectors such as services? and help curb an excessive reliance on exports, signalling it anticipates the currency will rise. For sure, the shift will not happen overnight but over time. Credit Suisse expects the renminbi to appreciate by 3-4 % over the next 12 months but cautions that the market might over-anticipate and end up disappointed. CS says the appreciation is positive for the equity market sentiment but is likely to squeeze profit margins among exporters. While the exchange rate move would help purchasing power for imported goods, the demand for commodities and machinery, CS, believes, would be determined by economic activity rather than purchasing power.

So while money may move in China now, over time it will be growth and earnings that will determine whether the flows sustain. By that yardstick, India is clearly on a much firmer wicket, the growth in the home market is visible and as of now, there?s little to suggest that it could get de-railed. India?s exports will benefit if the Chinese currency appreciates, Indian goods will become relatively more competitive. Inflows into the Chinese market, which were weak a couple of months back, were back on an uptrend in late April and the country saw inflows for four consecutive weeks starting mid-May. The news of the prospective revaluation of the renminbi drove up the Chinese market by 3% on Monday and the sentiment was strong across Asia. It?s possible more money will move into China since valuations remain relatively attractive. However, markets like India should continue to get more than their fair share of foreign inflows and remain relatively expensive than its peers; after selling stocks worth $two billion in May, foreign investors have shopped for equities worth $one billion so far in June. For sure a very high absolute valuation will force investors to rethink their options; but the bigger challenge for the Indian market lies in the huge supply of paper that?s on its way.