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Liquidity begets liquidity

india Updated: Nov 14, 2006 18:59 IST

Despite the seemingly stretched valuations, the Indian stock-markets are on a juggernaut-like roll. There is no dearth of those whispering about how soon the 15,000 points level can be breached. Levels of 14,000 and 14,500 points be damned, it is as though they simply do not exist. 

The occasional hiccups, known in market parlance as corrections, are getting increasingly short-lived. On the few occasions that they occur, a sharp rebound begins almost immediately thereafter, even before one can say 'Jack Robinson'.  For those confounded by this phenomenon, a look at the record mop-up figures by mutual funds in India in recent times might provide some cues.

It is party time for mutual funds in the booming Indian stock market. So, in addition to the spurt in investments by FIIs who just do not seem to get enough of India, one has yet another spare tyre added on to the seemingly unstoppable bandwagon. That some of the FII 'experts', who predicted a Sensex level of 7,000 points less than half a year ago are now waxing eloquent about nothing less than 40,000 points is incidental, of course. After all in the marketplace, 'the trend is your friend'.

Everybody, seemingly wants to buy stocks at lower prices and they have never been available at attractive prices in the recent past. As a result, it is believed that a fair amount in the coffers of domestic funds and an even larger amount in the coffers of international funds are waiting on the sidelines to be deployed in the Indian market.

Backed by high liquidity, and huge sums in the pipeline, the market is comfortably holding out at higher levels. Hence, whenever it seems that some sporadic selling was triggering the much awaited correction, some of the money on the sidelines was pumped in and hey presto—the markets took yet another astonishing upturn.

Mind you, a host of global funds, which raised India–specific funds, are also waiting in the wings to deploy resources in the market at lower levels. The Indian Finance Minsiter, now a past-master at gauging the market mood, has done little, if at all, to tinker with a booming economy and stock-market, with excellent end-results. As the cliché runs 'If it ain't broke, why fix it?'

To sum up, there is no dearth of funds in India at this moment, both domestic and international, which are sitting on a huge pile of cash waiting for a market correction so that they can deploy funds at their disposal at lower prices.

Unfortunately for them and fortunately for those already fully invested into the market, it is the presence of the former on the sidelines that is today, the biggest insurance against the Indian markets going into a free-fall from its current heady levels.

Email akmatrix@rediffmail.com

(Ashok Kumar heads Lotus Knowlwealth, a knowledge based consulting firm and can be contacted at ceolotus@hotmail.com)

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