THE market is firmly in the bull grip with economic fundamentals gradually catching up. Though there may be a correction in the short run as the valuations appear a bit stretched and most of the near-term positives have already been factored into current valuations. Also, some large public sector offerings are likely to hit the market soon. The long-term view of the market remains bullish. Economic growth for the April-June quarter is likely to be the highest of the previous eight quarters on the back of the sheer change in mood and sentiment. The signs of cyclical recovery are very much visible in industrial output, exports and corporate performance.
Strong inflows of foreign funds have allowed the RBI to build foreign exchange reserves while moderating inflation has given it the elbow room to release liquidity through SLR reduction. The latter is getting reflected in interest rates’ reduction announced by some leading banks recently. The softening commodity prices offer a big relief to a country that is a net importer of commodities and will also help it considerably reduce the subsidy burden. A distinct possibility of a sovereign rating upgrade has gradually emerged. Also, the country appears to be far better placed to handle any situation arising from the US Fed’s withdrawal of the quantitative easing programme and increase in interest rates sometime next year. The Indian market, therefore, may not witness massive outflows for the simple reason that most of the money finding its way to India is long-term with a few exceptions of some exchange-traded funds flows. In fact, investors may be selling US and European stocks to invest in emerging markets like India.
The market has clearly entered the second stage of the bull run that is going to be fairly long with economic recovery also entering the second stage and becoming far less fragile. However, the mounting NPAs of the banking system remain an area of grave concern that needs to be handled urgently. The market may give decent returns from here on merely on the basis of earnings growth without any rerating taking place. Private demand is strengthening when it is desired the most since the government is on an austerity drive. But, unless private investment recovers strongly, economic recovery may fizzle and the inflation monster may raise its head again.
The sentiment in the market has got a further boost with the fact that domestic institutional investors have become net buyers in a big way. This is also indicative of the fact that retail investors are coming back, which will be one of the very big factors that will prevent any sharp corrections in the market.
With growth picking up and twin deficits likely to be contained, if the government can meet some of the reforms expectations of foreign investors, India may continue to get sustained capital inflows that will not only keep the rupee stable but will also better prepare the economy and the market for sudden shocks emanating from dollar outflows or otherwise.
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