By Anjan Roy
The Indian stock market is looking like unstoppable, for now. The equity markets are scaling new heights and along with that, the investors are reaping riches. The BSE Sensex has increased by close to 1000 points in intra-day trading on Friday. The NSE index has climbed by close to 300 points.
The questions that inevitably follow such starry eyed spurts is will the upward trend be maintained or there will be a reaction and some corrections. Maybe, the latest AI models might be asked to give a kind of answer. But it looks as though even the AI wizards would be flummoxed at such questions.
Going by overall reactions to the rise, some of the market experts at least feel that a correction could be on the way later in the month. But that still remains anybody’s guess.
The more relevant question could be what factors are driving such optimism in the financial markets. One does not have to look far and wide in search of the answers this time. There is a favourable coincidence this time and the rally could last for a while. Low inflation after a long time could be the principal positive development recently.
A low inflation feeds on the expectations of an easier money policy and downward revisions of the policy rates. Here, the Reserve Bank governor has not said much about beginning a rate cut cycle. Rather there is a note of caution and watchword is the RBI is monitoring closely the inflations prints.
But then, the big brother among the central banks, the US Fed chairman, Jerome Powell, has indicated the possibility of rate revisions cycle rather faster than the markets anticipated. That had acted as a heady cocktail for the market.
But then most immediately for here and now, such wild upswings are too much of a good thing. These imitate a feed-back channels which promote a kind of euphoria, even though such things tend to be short-lived.
Although stock markets investors are none too large, but such widespread upward swings in the market creates a kind of “feel-good” factor which works towards strengthening consumer sentiments. This will at least leave a wealth effect with the investors and could surge consumption demand.
When the BSE Sensex had touched 70K, it looked high. Now, it is sailing past 71K. Look at the pace at which these things are happening. While it took 93 sessions for the Sensex to climb 1,000 points, it took just a day reading to rise from 70K to 71K. Rationally speaking, this is precarious. When mood swings are that sharp the reactions could be equally strong. But, leave that for a moment, let us examine he factors giving such boost and how stable these could be.
Primarily, this is a reflection of some global trends which are influencing funds flow across boundaries.
The American central bank, the Federal Reserve, as we had mentioned, had indicated earlier this week that in view of the softening of US inflation rates, there might an unwinding of the restrictive monetary policy and a possible cut in interest rates might be ushered in. US inflation slowed from 7.5% last year to around 3.5% now. That is a robust development.
How far this is expected to be maintained.? Could there be a return of stronger price trends. This is unlikely as US wage growth has been running faster than inflation prints and these are now anticipated to flatten out. Secondly, oil prices are also leaving sobering marks.
The Fed chairman’ s statement had sent waves of enthusiastic responses and the US financial markets became enthusiastic. The US stock market had witnessed huge buying of stocks by investors and in consequence the US market climbed.
On the other hand, in anticipation of the US rate cuts, investors reviewed their options and are looking for opportunities in other financial markets. Bond market investors found future earnings possibilities pared and hence they are obliged to look for other markets and other products.
Why the funds should be coming into Indian markets?. This is because the alternative markets are looking unattractive. China, until recently the largest market other than USA, used to attract funds. However, the Chinese market itself is sagging and the political bosses are seeking to control every development in the Chinese economy.
The market sentiments in China have been severely affected by the political moves of the Chinese Communist Party and senior executives of large number of companies have been arrested. Companies in China have informed the Chinese stock market authorities of missing chief executives. The news have resulted in sagging in Chinese stock markets.
In turn, the Indian markets have continued to rise. Firstly, the macro-economic situation in India is favourable. Until recently, the prices were rising and threatening the positive sentiments. The Reserve Bank had to intervene with higher interest rates.
However, recently, the prices have softened. The consumer price index has given a lower print, although some spurt has been witnessed. The prospects of rising interest rates in India appear remote. Hence, the investment prospects are bright.
Experts are anticipating strong funds flows from overseas and this is pushing up the stock market. According to official figures, foreign institutional investors have been pouring in average Rs4000 crore per day in the first ten days in December.
In the previous month, the foreign investors have invested Rs.9000 crore. All these are before the US Federal Reserve’s announcement of possible interest rate cuts.
These are indicative of the positive sentiments about investments in India and this is likely to continue. The investors are reaping the benefits of staying invested. The next year is likely to be an investor’s year for those who can garner resources and courage to invest in the Indian equities. (IPA Service)
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