The Hindu Business Line : 6000 and going strong

AS MILESTONES GO for the nation's stock market, the breaching of the 6000 mark by the Sensex — the Bombay Stock Exchange's bellwether index of equity prices — would easily rank among the more significant events in its chequered history. The palpable sense of well being that this has generated in an investing community starved of any good market news for nearly four years is of course entirely understandable. But no less easy to fathom is the positive vibes this must be generating for the ruling alliance, which by all accounts is on the verge of calling for early elections to the Lok Sabha.

Aberrations on individual stocks apart, on the whole there is little doubt that the current valuation is well within internationally accepted norms of capitalisation of future profits. Even so, the Reserve Bank of India is understandably, and quite rightly too, concerned about the possibility of speculative pressures building in the market and has directed banks to impose additional margins on lending against shares. The problem with stock market valuation is that players therein are not betting on the basis of reported profits but rather on future accruals and it is hard to impose uniform yardsticks on such expectations within the investment community. The game of expectations with its interplay of differing perceptions among different classes of investors trigger alternate spells of exuberance and pessimism giving rise to the bullish and bearish phases in the stock market.

The presence of foreign institutional investors adds to the complexity of the equation. Their investments have had a decisive role on the course the Indian market has taken in recent times. This becomes clear from the fact that while they have pumped in close to Rs 35, 000 crore this fiscal, when the domestic mutual fund industry has added a mere Rs 1, 000 crore to its corpus. Though latest statistics on the commitment of resources by the domestic financial institutions and retail investors to the stock market are hard to come by, historical trends suggest that this is unlikely to be anywhere near the funds committed by the overseas investors. Clearly, then, the party on Dalal Street will last as long as the FIIs continue to pour money into the Indian stock market.

The stability of the Indian economy on the external sector and the relative weakness of the dollar in the international currency market has eliminated at least one source of value erosion for the FIIs with regard to their investments in the Indian market. But a more serious problem lies ahead as they realise sooner rather than later that the potential pool of investment candidates is rather small in India. Many, many more Infosys are needed for the steady flow of overseas dollars to find a ready outlet in the stock market. The present situation is thus as much a challenge for Indian entrepreneurship as it must be for the policy-makers who have the task of keeping the growth impulses in the economy going strong.

More Stories on : Editorial | Stock Markets

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
An ESOP fable

6000 and going strong

Budget-making: An exercise in guesstimates

SAARC initiative on free trade

Poor politicians!

The perils of private food export

Reform labour laws, now

Provident Fund

Indian economy