Samvat wishes

Favourable global liquidity will keep investors happy

The movement of the equity market during the Muhurat trading session is traditionally seen as a precursor to its behaviour during the year. The Bombay Stock Exchange benchmark index, the Sensex, closed at 21,239 at the end of Sunday's Muhurat trading session, up 43 points over the previous close. Even in the weeks leading up to the new Samvat, the market has shown a buoyancy that had been missing for a long time, with the Sensex crossing its previous all-time high. Since then, while it never reached the depths of late 2008, there was a general sense of "range-boundedness", which seemed to reflect a genuine nervousness about the economy's performance, prospects and the ability of the government to deal with several stress points. So, does the recent boom indicate that a corner has been turned and all is well from now on?

As much stock as domestic investors may put on traditional indicators, hard-headed realism is what presumably drives actual investment decisions. On this basis, not even the most optimistic assessment would attribute the recent surge to a decisive reversal in the underlying negatives of the Indian economy which would unquestionably impact sales, earnings and valuations over the coming months. The fact that the markets have surged beyond all expectations in the past few weeks can only be explained by the turnaround in short-term expectations as a result of global developments, particularly the decision to postpone the rollback of its quantitative easing - the 'taper' - by the US Federal Reserve Board, based on its assessment of domestic macroeconomic conditions in the United States.

While everyone knows that the rollback will happen eventually, the signals from the US suggest reprieve of a few months, which is a long enough horizon for investors to try and exploit while the going is good. In short, in the absence of the real drivers of the domestic economy - low inflation, high investment, particularly in infrastructure, fiscal consolidation and a structural narrowing of the current account deficit - the market is likely to rise or fall on the basis of what is happening outside the country rather than what is not happening inside it.

However, it is quite obvious that this kind of momentum cannot go on for ever. When the taper begins, a portfolio re-allocation is inevitable and, in the absence of any domestic policy action between now and then and, among the emerging market economy group, Indian markets could be hit relatively hard, given the grip that the political cycle now has on economic policy. If this happens, as is now generally expected, around March or April of 2014, the Indian government will be in the thick of political action, with little capacity or ability for a strong response. There is always a possibility, of course, that US indicators for the first couple of months of next year will persuade the Fed to further push back on the taper, which will help the equity and currency markets to hold positions until the new government takes office and is able to articulate its policies and programmes to get the economy's fundamentals back on track. What will make the new Samvat memorable for investors, then, is a persistence of favourable global liquidity conditions until the new Indian government begins to deal with the several bottlenecks that have entrenched inflation and hobbled growth in the economy.