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Manik Kumar Malakar , Hindustan Times
Mumbai, November 01, 2013
The Sensex, the benchmark index of the Bombay Stock Exchange (BSE) on Wednesday crossed the psychological 21,000-level and is fast closing in on its all-time intra-day high of 21,206.77, which it posted on January 10, 2008. However, India’s macro-economic picture — whether it is Inflation, index of industrial production or the more widely discussed gross domestic product growth — has been anything but promising. 

Thus, the question in the run-up to Deepavali 2013 is: What are the markets happy about? And is the positive mood in the markets sustainable or is it a bubble waiting to burst?

“The current upswing in the markets is a liquidity-driven rally,” said Mehraboon Jamshed Irani, principal and head of private client group at Nirmal Bang Securities. He noted that a major driver of Indian (and global) equity markets has been the US quantitative easing programme that, according to incoming Federal Reserve chief Janet Yellen, is set to continue.

“This liquidity is set to continue well into 2014 as Yellen is unlikely to make major changes soon after taking over,” Irani added.

Read More: Looking up: Markets likely to kiss 22,000 soon

“There is some strength in the markets as foreign institutional investor (FII) flows have picked up, the overall liquidity situation has improved and corporate numbers (Q2, 2013-14) are, by and large, better than expectations,” said Sanjeev Zarbade, vice-president, private client group research, Kotak Securities.

Quarterly results across the board – especially in IT, auto and FMCG — have been a big positive surprise.

“A combination of liquidity, revival and optimism has boosted sentiment in the markets,” said Zarbade.

“The markets are definitely, for the moment, ignoring issues like CAD, IIP and other macro-economic indicators, which are looked upon as dirty words on the Street,” said Irani.

August IIP slowed to 0.6% on weak consumption demand coupled with shrinking manufacturing and mining activities. The Reserve Bank of India (RBI) has cut India’s GDP growth forecast to 5% for 2013-14 from its earlier forecast of 5.7%. 

Experts feel there is potentially a massive upside for the equity markets from their current (already elevated) levels this Deepavali over the next one year.

“There is a lot of action lined up till next year’s Deepavali, including elections in India and tapering globally,” said Jayant Manglik, president, retail distribution, Religare Securities. He feels the Sensex could cross 24,000-levels by next year’s Deepavali.

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“Aided by continued benign global liquidity as well as positive domestic catalysts, we expect the Sensex to hit new highs in the coming months, with a target of 22,600,” said Vaibhav Agrawal, VP, research, Angel Broking.

But this is critically dependent on some variables that are beyond anyone’s control. The economy is expected to gradually recover if, after the 2014 elections, India gets a stable government that carries on with the reforms push initiated by UPA.

If, however, the election throws up a hung House that leads to the formation of an unstable government that overturns decisions like the one on allowing foreign direct investments in multi-brand retail and chooses not to push forward with reforms, then, the economy, which is showing signs of having bottomed out, may once again go into a tailspin.

But market players are, at this point, fairly confident that it won’t come to such a pass. “The political class, with a few exceptions, is largely supportive of reforms. As the examples of the Deve Gowda and Inder Gujral governments  showed, reforms will continue regardless of who comes to power,” said the CEO of a leading broking firm.