Windfall year

Rarely has the Indian stock market seen such dramatic yo-yoing. In October, the Sensex reversed a heady bull run and dipped about 12 per cent, only to swing right back up now. A month ago, hope was a commodity in short supply because, after a one-way run to a high of 8,821.84 points on October 5, the Sensex dropped over 1,100 points by the end of the month. And now the index has gained 1,300 points in the space of barely four weeks. Is this irrational exuberance, or a sign of sustainable buoyancy?

The answers lie outside the country, because it is the foreign institutional investors who continue to determine the market's swings. They pumped in over Rs 37,500 crore till September of 2005, and then in October pulled out over Rs 3,800 crore. This month they have brought back in about Rs 3,774 crore. All those wondering which way the market will move next, will basically have to read global fund managers' minds""because it is clear that domestic trends have little to do with these large swings. There was the fear a month ago that valuations had turned expensive and that the high price levels were unsustainable. The market was at a trailing price-earning ratio of 18.15 then, higher than in other emerging markets (barely 10 in places like Brazil and South Korea). Now, valuations remain high with a P/E of 17.67 at Monday's Sensex close of 8,994.94 points, and no one seems worried about over-the-top pricing.

Little has changed within India in the last month, to warrant the Sensex doing this dance. If anything, corporate results have lost some of their zing, so there should be less buoyancy in the system. What has changed is the external situation. Oil prices have fallen as winter demand seems to have been accounted for. The US Federal Reserve has also indicated that it may cease raising interest rates in the near future. Though analysts continue to expect a rate hike in December and perhaps January as well, the expectation is that that could be the end of the line. Strong US GDP growth, at 3.8 per cent in the September quarter, has also helped the rally in global markets. And a stronger US dollar has only boosted sentiment further. All these factors have managed to renew investor confidence in equities across the globe.

Making forecasts in such a volatile market is even riskier than usual. But it is worth noting that the aggregate profit growth rate for Corporate India slowed to 16.14 per cent in the September 2005 quarter, from 20.35 per cent in the previous quarter. As results came pouring in through October, FIIs kept pressing sales buttons on trading terminals. If there were opportunities later, they could always buy the stocks back. The market would have fallen even further, had domestic mutual funds not provided price support. These mutual funds, many of whom were sitting on a neat cash pile, bought when the FIIs were selling""over Rs 2,900 crore worth of paper, as valuations turned attractive. Now, of course, the FIIs themselves are buying again.

Mr Chidambaram said a few months ago that he saw the Sensex reaching 8,000 as a worry trigger. When what was a remote prospect started beginning to look like a possibility, he fortunately modified his position. And now, even at 9,000, the market does not seem crazily out of line. But the truth is that this gravy train will run as long as FIIs continue pumping money into the market. On the strength of that, it seems certain that 2005 will end up as a milestone year for the Indian stock market, matching the bull run of 2003.