When the Reserve Bank of India raised its policy interest rates more than expected last week, it should have been bad news for the stock market. It was not: markets went up instead of down, and on Tuesday, the Sensex closed at just over 20,000. Except for one day, the stock market has been rising every single trading day in September thus far. Granted, September has been good for global stock markets, not just India’s: American indices are up, as are those in other Asian economies. September’s gains are the largest contributors to annual gains. On Indian shores, every single piece of economic data has been given a positive spin, from industrial production figures through inflation to interest rates; the markets have ignored all the caveats. Duvvuri Subbarao, the governor of the Reserve Bank of India, has suggested in recent speeches that economic growth is fairly well grounded. And somehow, markets have interpreted Mr Subbarao’s statements in the central bank’s policy review as indicative of the end — or, at least, a long pause — in the aggressive interest rate hiking cycle.

There has been other news that appeared to suggest that deposit rates would also be freed completely (only two are regulated — the savings bank rate and the rate on small savings). So, interest rates, instead of being bad for the economy, have ended up being good for the banks, whose stocks are among the biggest movers. Many banks are trading at prices much higher than those that prevailed when the Sensex was over 21,000 in January 2008. HDFC Bank is now 36 per cent higher than its January 2008 price; another private sector bank, Axis Bank, is trading at nearly 30 per cent higher than its January 2008 price. ICICI Bank, however, is about 24 per cent lower than its January 2008 price levels. But a key fact to remember is that almost all of this market revival is led by institutional investors — mostly foreign ones — bringing in large amounts of capital inflows.

The retail investor has been almost completely absent. Taking advantage of the positive sentiment (or spin), many companies are raising capital through public equity offerings that could attract retail investors; the response to them, however, has been spotty. And at some point, the RBI may have to worry about the impact of excess liquidity created by all the capital inflows into the markets, and take some aggressive steps to control it before it has an adverse impact on inflation. The elephant in the room is whether this upturn is sustainable; after all, the market is the combined behaviour of thousands of people responding to information, misinformation and whim.