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Don’t get carried away

business Updated: Sep 26, 2010 23:07 IST
Abhijit Patnaik
Abhijit Patnaik
Hindustan Times
Highlight Story

Stockbrokers and equity investors are cheering. Dalal Street resembles Rio de Janeiro during the Carnival. With full-page newspaper analyses of the Sensex “trumpeting past 20,000” and financial experts distributing gyan on TV, is it hard not to break into major samba moves to celebrate this market milestone?

But does foreign institutional investors (FIIs) pumping in more than $16 billion (Rs 75,000 crore) in 2010, pushing up the Sensex, signal the economy’s resilience and growth?

“Getting to 20,000 is a significant achievement, especially given where we were one year ago,” says Divyesh Shah, CEO, Indiabulls Securities. The Sensex was in the 16,000-17,000 range in September 2009.

Flash in the pan?

Experts tread cautiously when commenting on whether this current rally is sustainable, or merely a temporary spike.

“There is a vast difference in the way the Sensex has moved up now versus earlier. In January 2008, the Sensex surged beyond 20,000 since we were part of a worldwide rally and the easy availability of liquidity. Today, Indian stocks have outperformed the US and China. The IT and auto sectors have shown extremely encouraging signs, and first quarter 2010-11 corporate performance was also good,” says Shah.

“With the elections last year, political stability and economic recovery, the markets began looking up. From June 2009 to May 2010, the Sensex was stuck in the 15,000-17,000 range, but in the last few months, risk perceptions have improved,” says Saumitra Chaudhuri, member, Planning Commission.

Harbinger of some good things…

No one denies that a rise in the Sensex is good news. The problem could lie in reading too much into these numbers.

“There are some visible connections between the stock market and growth The positive connection is that companies can raise money for investment more easily when the Sensex is ruling high, which is important,” says Chaudhuri.

“The increase definitely reflects today’s growth. Look at core output numbers like the Index of Industrial Production. These, in a real sense, are driving up the Sensex. FIIs are coming in based on these, not on hearsay,” says Shah.

Glossing over fundamentals?

Inflation remains a niggling problem that has policy-makers and investors worried, according to Shah. In January 2008, inflation was 4.45 per cent. The latest August 2010 figures were almost double that, at 8.5 per cent.

Inflation is one of the main concerns of the Reserve Bank of India (RBI), which has increased the repo rate (the rate at which banks borrow from the RBI) for the fifth time this year, to 6 per cent (from 4.75 per cent at the beginning of the year).

Higher interest rates are a deterrent against buying on credit. Less money in the system leads to fewer purchases and this, in turn, impacts growth rates.

And, hiking rates has the detrimental effect of reducing domestic investment precisely because it makes borrowing more expensive. According to Chandrajit Banerjee, director general, CII: “Ensuring timely availability of credit and directing banks to provide easier and cheaper credit is vital to higher manufacturing growth. With banks already raising their lending rates, the CII is concerned that industry may find it difficult to fund capacity expansions and even some existing projects may become unviable.”

India has done well in attracting FIIs in an extremely risk-averse global environment. However, global uncertainties like deficit-related problems in countries such as Greece and Spain and the faltering recovery in the US could keep the markets volatile and investors wary.

There is also the Indian real estate sector. From a high of 13,848 in January 2008, the realty index, which reflects real-estate stocks, is limping along at the 3,700 levels (as of September 2010).

Remember, along with the financial sector crisis, this sector was at the heart of the meltdown, which brought the American economy to its knees.

Shah is optimistic. “The realty indices are not a cause for worry — once the debt issues get sorted, things will become better,” he says.

Breaking the psychological 20,000 barrier shows that government policies have been business-friendly and that the domestic demand-driven growth is a source of confidence for investors.

It would, however, be prudent to not forget another set of figures to get a holistic picture of where India stands: What percentage of Indians live below the poverty line?

If you knew that, you would save that bottle of Dom Pérignon for another day.