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The rampaging bulls have taken charge of the Indian stock markets, as their bellwether indices the Nifty and the Sensex, touch new highs, riding a huge liquidity wave and a feel good factor. The Nifty has raced to 9237 and the Sensex was just 90 points away from the dizzy 30000 mark, with the volatility index, the VIX, at its lowest level, indicating investor confidence into the foreseeable future. Even the midcap and the small stocks have been zooming as the BSE Smallcap index surged to an all time high and so did its Midcap Index. Sectoral indices such as the consumer goods, power and capital goods have scaled their fifty two week highs and continue to rise. The foreign investors seem to be in a mad rush to ride the India bandwagon, resulting in a huge gush in capital inflows. FIIs have pumped in a stunning USD 6.1 bn in 2017 itself so far and have been net buyers of Indian stocks in trading session after session. Domestic mutual funds too are awash with investor money, which is being hurriedly routed into the markets. The MINT reports that the Goldman Sachs analysts predict the surge to continue, expecting the Nifty to touch 9500 in twelve months and 10200 by end 2018, as India Inc’s earnings gather pace, driven by 12% and 15% growth this financial year and the next. The rally in the bourses is astonishing all the more, since emerging markets like India, have been out of favour with the foreign investors for quite sometime.

India’s markets are indeed the shining star on the global horizon, as often proclaimed by the present government.

While a runway growth in the stock markets, with investors blinded by apparently short term gains, is always irrational and unsustainable, there are yet a number of factors that make India a darling of the investors. The Indian economy displays very solid macro economic fundamentals and the country is in the grip of political stability, a perfect combination to drive growth in a vibrant democracy. The inflation beast has been tamed, the CAD deficit is favourable due to huge/continued FDI inflows, forex reserves are at an all time high, the rupee is stable against the dollar, exports are growing at a fast pace, interest rates are softening, there has been a record growth in factory output riding a surge in orders and the growth in the consumer demand remains unabated. So strong is the middle class demand, that lakhs of two wheelers at discount, were recently bought in a matter of a couple of days, with autodealers being mobbed, to beat a Supreme Court deadline. The adverse impact of the demonetisation demon, has been much lower than expected  and with such political stability, the all round perception is that  India will grow at an annual rate, upwards of 8%, in the long term, thus providing an unmatched opportunity to foreign investors and  enterprises. The government’s commitment to reforms remains intact, such that the niggling overhang of stalled infrastructure projects too is being resolved, to unbottleneck growth.

A runaway growth in stock markets, indicates collative irrationality and is dangerous and unsustainable. A calibrated growth, supported by build up of  corporate earnings, on the other hand, is safe and sustainable. A rapid build up, can also lead to a rapid meltdown of markets. The present Indian markets are overheated and are largely founded on hope and expectation. While corporate earnings have started looking up, yet without a build up in private sector capital investment, it is too early to conclude that they are in a durable phase. Factors like a poor monsoon, a poor credit offtake, a failed quarter of corporate earnings and a delayed resolution of the NPA crisis can upset the applecart of the booming bulls. Rush to join the Indian bandwagon, which certainly promises long term profits and growth, but with care and caution.

akhilesh@akhilesh.ca akhilesh@arbco.ca