The hope of another foreign-exchange surge into India — forex reserves across emerging markets are expected to hit a record $1 trillion (Rs 39.5 lakh crore) in 2007 — powered the Sensex to a historic figure of 20,024 on Monday.
<b1>Domestic and foreign investors scooped up Indian equities as the Sensex made its third largest intra-day gain ever, 781 points, in advance of an anticipated US Federal Reserve interest cut on October 31.
The Sensex has gained 27.5 per cent since the last Fed rate-cut on September 18; and the climb from 19,000 to 20,000 took only 11 trading sessions over 14 days.
“Why are you looking at that particular number?” asked Hemendra Kothari, chairman of DSP Merrill Lynch. “It was a foregone conclusion that flows waiting would come.”
Emerging markets like India have become hot investment destinations because of a weakening US dollar and economy, said observers. Countries that traditionally invest forex reserves in US bonds now divert some money into the world’s growing economies. That growth story is the bedrock of the stock surge. India’s economy is likely to grow at close to 9 per cent, said Finance Minister P Chidambaram at the Indo-US CEO forum in Mumbai on Monday.
This is lower than last year’s growth rate of 9.4 per cent. But with the world’s largest economy, the US, expected to post a Gross Domestic Product growth of below 2 per cent this year, analysts said there is a 30 per cent chance of a US recession in 2008.
China is the world’s fastest-growing economy with an 11 per cent growth rate. India is second, but since its growth is largely driven by domestic demand, it may be more insulated from a recession than China and Asia’s other tiger economies riding on exports to the US, experts said.
It took 15 years for the Sensex to sail from 1,000 points to 10,000, as India opened up its economy from 1990 to 2006. With Indian companies outperforming the overall economy, the Sensex made its next 10,000-point jump to 20,000 in just 20 months.
Experts advise caution: Global crude prices are rising, export-led industries are struggling with a strong rupee and curbs on forex inflows measures are possible.