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BROADER BASE

Is the bullish trend in the stock market likely to continue' The answer is probably yes. With the timely arrival of the monsoons, the earlier Indian meteorological department forecast leaning towards below-normal rains has been discounted. Consequently, the agricultural sector is expected to do well and fast moving consumer goods and tractor stocks have perked up. In addition, robust agricultural growth implies that the economy will do better in 2003-04 and this positive sentiment has favourably affected many old economy stocks. Nor should one forget robust export performance, although questions have been raised about its sustainability thanks to rupee appreciation in 2003-04. However, the bullish sentiment has also been driven by stocks of public sector banks, many of which displayed healthy profits in the last quarter of 2002-03. The finance minister is concerned about volatility in stock prices of public sector banks and has asked the securities and exchange board of India to investigate. In part, this volatility is undoubtedly linked to uncertainty about prices at which equity buyback will take place. Earlier, the government capitalized public sector banks through re-capitalization bonds (held by government as equity) and these will now be redeemed through equity buybacks. There is uncertainty over whether this buyback will be at market prices or at par. But bank stocks should continue to do well and this will spill over to private sector banks.

After all, Parliament is soon expected to legislate, permitting majority foreign stakes in private Indian banks. Clearly, higher profits and expected disinvestments (if not privatization) have also stimulated interest in petroleum stocks. There remains the moot question of whether institutional investors (foreign and domestic) have driven this bullish phase or whether retail investors have been weaned back. Although the heavily over-subscribed Maruti initial public offering issue exhibited retail interest and there have been several initiatives to improve corporate governance and regulatory structures, it is doubtful that retail investors have overcome the two stock market scandals (1992, 2001) or the phenomenon of disappearing companies (including plantation companies), non-banking financial companies and mutual funds in the mid-Nineties.

Despite the last Union budget’s message of driving investments to the stock market, clearly retail investors still prefer fixed deposits in banks or debt funds. The original euphoria over IT stocks has also been muted by expectations of rupee appreciation adversely affecting software exports, not to speak of a backlash against H1-B or L1 visas or outsourcing. But if the economic recovery is sustained, this may well change, with upward movements in stock prices also spilling over into infrastructure scrips. Thankfully, the present bullish trend seems to be more broad-based, compared to the rigged runs of 1992 and 2001.

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