TREND IN THE INDIAN STOCK MARKET – BY Dr. BOBBY SRINIVASAN AND Dr. SUDHAKAR BALACHANDRAN

November 28, 2014 | Posted by bobbysrinivasan << back to blog

Sensex which is a barometer of the Indian stock market is also an indicator of how the foreign institutional investors love investing in our country. In the recent period, portfolio investor poured in net investment worth $45 billion into the debt and equity markets between October 1, 2013 and November 21, 2014. As its result, the sensex has gone up by 55% since September 1, 2013.

First of all, we should not conclude that the current sensex rally is primarily due to the pumping of $45 billion by the FII’s even though a significant portion of it could be due to them. Second, it is not clear as to whether additional money would come in to boost the market further. For all practical purposes, the Indian stock market is a gambling casino with every FII wanting to participate in the game. A small and an insignificant number of retail investors are doing piggy back riding on the FIIs investment without thinking for a minute that when the trend reverses they will be the last one to bail out with massive losses. This happened in 2008 when our sensex dropped from 21000 to 8000 in less than 10 months. A word of caution to the retail investors! Remember “fools rush in when Angels fear to tread”.

A number of observations need to be made to bring clarity in this regard:

The primary driver of sensex is FII money. As of now, it is estimated that more than US $200 billion is invested in our market. Our national reserve currently stands at $315 billion. Any sharp exodus by the FIIs, for whatever reason can drive our markets significantly down. The value of rupee will also be threatened.
Retail investors are ignoring the fundamentals which relates to the growth in profit. The July-September 2014 saw 3300 companies settle for single digit growth as against the double digit growth in the previous four quarters. The aggregate sales growth has also dropped to 3.2% from the 10% plus levels.
At 28500, the sensex index trades at PE (price-earnings ratio) of 19 times and factors in a 14% earnings growth. Of course all these parameters could be ignored as long as the liquidity continues to flow in. This means low interest rates in the US dollar will continue for a while and so FIIs can achieve a real return by investing in the sensex.
Euphoria has always existed in the past and will definitely happen in the future. The question then is why and what exactly is the euphoria due to? I will try to answer. First, the inflation scene is very comfortable. The WPI has come down so much in the last few weeks that it is not a threat any more. Second, RBI is more likely not to increase the repo rate in the near term. In fact, there is good chance that the repo rate may even come down. Third, there seems to be no liquidity constraint. For foreigners seeking better return, India’s sensex appear attractive. Fourth, it is unlikely that the Indian rupee will depreciate and as more and more FIIs are committing funds in the near term. So they need not worry about his. Five, there is plenty of optimism about Modi government’s promise to bring about a change (psychological factor).

However, there are many things that are happening in the global economy. Serious deflation in many countries, economic slowdown in many others and all these point to a changing global environment. Ultimately, experience shows that liquidity always drives the stock market and let us hope that this is the same for the Indian sensex which enjoys continuous supply of new money coming in and this game will hopefully continue for some more time. As they say, enjoy while it lasts.

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