Sensex viewfinder

Updated: Sep 30 2007, 05:48am hrs
Indias latest equity market rally has revived the debate on whether we have finally shed our fears of subprime contagion and decided to move ahead decisively based on the India growth story. The latest surge, with the Sensex hitting a new life high of 17,000, a 1,000-point soar in a span of just six sessions, does, however, highlight a number of factors. For one, the rally this time was triggered by the move by the US Federal Reserve to cut its key rate and its discount rate by a sharp 50 basis points each in an attempt to infuse liquidity and save sentiment. Second, and more important, the last 1,000-point up move was almost entirely driven by foreign institutional investor (FII) inflows. Consider the figures: in September alone, FIIs have pumped in a hefty $3.4 billion, taking the net FII investments this year to a staggering $11 billion, the highest ever so far. FIIs clearly see value in Indian equities even at these high levels, what with price-earning ratios now relatively steep.

Domestic mutual funds, meanwhile, have been booking profits for their investors. Are FIIs being overbullish on India Not on current evidence. Economic growth is good and corporate earnings remain robust, which provides room for still further gains in the days to come. Listed businesses across sectors have broadly been performing in line with expectations and delivering results, despite the base becoming larger and larger. Most remarkably, perhaps, the equity market has learnt to take political uncertainty in its stride, as exhibited by its rather restrained reaction to the sabre-rattling witnessed in New Delhi by the Left parties on the Indo-US nuclear deal. The latest rally has also been on the back of extremely high turnovers and trading volumes, signalling that there is enough depth to it. Add to that the fact that even at such high levels, the market has not witnessed even a whiff of a payment problem a sign that the bourses are well governed under the aegis of the Securities & Exchange Board of India and you have a situation where FIIs feel comfortable betting their monies. India no longer attracts the usual emerging market erms and ahems of irrational diffidence.

Having said that, there is also a truth the market has begun confronting: that no matter how much wishful talk there is of de-coupling or the markets getting delinked from the problems of the global financial system key linkages, in these globalised times, will always remain. So, despite the limited extent of FII control over the Indian equities market, if the US Fed does or does not do something, it will, willy-nilly, have some impact on the way Indian equities behave.

All in all, the bullishness is not without reason, though there may be differing views about the intensity of the celebrations called for. However, the next big trigger will be the Q2 results to be turned in by India Inc. If these numbers justify the faith the market has placed on Indian companies, a revitalised rally may be on the horizon. As experts repeatedly say, the Indian market is in the midst of a long bull cycle. But there will be intermediate corrections, which can and should happen to take the excess heat off the system. It is these intermediate corrections which the retail investor should use as buying opportunities. It is a time for cautious and informed optimism.