FEAR OF HEIGHTS

The ascent of Everest is no longer very remarkable. But an oxygen-less, fast ascent is still considered a major feat. Staying with this parallel, the climb of the Sensex beyond the 5000 mark is significant but more so is the speed of the upward movement of the Sensex curve. It could be argued, of course, that since the climb has been fuelled by the influx of foreign funds, the ascent cannot be compared to an oxygen-less ascent of Everest. The dependence on foreign funds has raised sceptical eyebrows about the sustainability of the rise. There are grounds for scepticism and it is also true that claiming greater heights will become more and more difficult. But all this should not take away from the fact that the rise of the Sensex is also a function of the strength of the fundamentals of the Indian economy. India Inc — that charming shorthand for corporate India — is performing well with profits on the rise. The projected growth of the economy is pitched at seven per cent but there are many who believe that eight per cent is more likely. The great barrier of the Hindu rate of growth has been left far behind. It is this buoyancy and optimism that has made foreign institutional investors seek the Indian bourses.

It has been clear for some time that there is a surplus of global liquidity and FIIs are pouring money into emerging markets. India is currently the preferred parking place. The million dollar question without an answer is how long will this trend hold. There is something inherently unpredictable in the phenomenon itself. There are other emerging markets that are cheaper than India and funds could easily move there. Doomsday prophets also argue that the regime of low interest rates is poised to change. The Australian central bank recently hiked interest rates and this could be a signal for FIIs to abandon emerging markets like India. Observers of the Chinese economy have commented on the greenhouse effect there, and have argued that next year investment growth will fall dramatically in China. If these signs bring forth the expected consequences then foreign inflows into the Indian stock market are bound to be adversely affected. But this is not sufficient reason to abandon all optimism. The monsoons are expected to be good and this should further strengthen the fundamentals of the Indian economy. The accumulated benefits of a decade of economic reforms are now being felt in the stock market and elsewhere in the Indian economy. Caution is always advisable but curmudgeons only spoil the ambience with baseless pessimism and conspiracy theories.