Fear Not the Raging Bull

Fear Not the Raging Bull

Surjit S Bhalla, Managing Director of Oxus Research and Investments, an economic research, asset management, and emerging-markets advisory firm based in New Delhi, and a former economist with the World Bank, Brookings Institution, Rand Corporation, Goldman Sachs, and Deutsche Bank - expects a 10% increase from the current 17,000 plus levels on the Sensex in short order. He also gives a 60% probability on the Sensex reaching 20,000 by March 31st 2008.

This forecast, coming as it does after a 1,600 point plus break-out that began only on the 19th of September, is so bracing, that it makes the sceptics reach for the Panadol as they point to it as yet another example of the jingoistic “myth-making” that seems to have seized our deluded souls. But the facts, even if they appear to be on “steroids” cannot be ignored for the pointers they give us. On the 19th instant, the Sensex notched up 654 points, posting the largest jump during a single trading session in Indian stock market history. The Sensex was catapulted from 15,668 to 16,322 in one fell swoop. Since then, in a mere 9 days with just 7 trading sessions, the Sensex has scaled a pinnacle of 17,291 as on Friday, 28th September 2007 - backed by USD 1.5 billion of fresh foreign investment over just one trading week.

Is this kind of rise sustainable in the future? Yes it is – even if the particulars of a given trading week change to reflect the dynamics of an ever deepening and widening market. We can look forward to reduced volatility in absolute terms as this happens, the process being akin to gradually transferring from a frigate to an aircraft carrier.

Consider the immediate facts: the inflation rate is down to a five year low of 3.23% owing to Reserve Bank of India (RBI) Governor YV Reddy’s conservative management of the liquidity situation and lending rates. Dr. Reddy has avoided a housing loan crisis here while strengthening the banking system and stopping inflation (as per the wholesale price index) in its tracks, halving it from a run-away near 6 per cent -and this, without, as is evident, harming growth. It may therefore be an indication of the momentum that has seized the Indian economy that the second quarter figures to come around the 10th of October 2007 are expected to show continued healthy growth percentages despite higher interest rates, more stringent lending norms and high oil prices.

The erstwhile humble rupee is at its strongest in nine years against the US dollar, with every chance of strengthening further despite the RBI’s attempts to slow its appreciation. And the more the rupee appreciates, the more the foreign money pours in, chasing both the arbitrage opportunity on top of the already healthy portfolio investment returns. Likewise, the long-term money flow seeking healthy returns on equity against project investments is also accelerating. All this, of course, in the backdrop of a gross domestic product (GDP) growth rate of over 9 per cent per annum tending towards year-on-year double digit growth.

So not only are we headed towards 20,000 on the Sensex sometime in 2008 but we are also headed towards 40,000 in a matter of just a few years, perhaps by 2010 or 2012. In the meantime, it is entirely likely that the strong rupee will turn convertible sooner rather than later as the RBI gives up trying to stage manage its value.

This is most definitely a momentum market underpinned by the fundamentals of good performances from corporate India, a strong rupee and high real estate values. With a measure of determination to ease physical infrastructure bottlenecks and financial market structures, further growth is assured. In addition, we can expect a boost in the near term, from a flood of foreign investment to come post the signing of the final set of papers that turns the nuclear power deal with the US operational.

Much of the growth we are now experiencing however owes its success to the policy decisions taken in the early days of economic liberalisation. There is an urgent need now to ease various bottlenecks in physical infrastructure as well as in our financial structures so that we don’t choke on our own success. This will be the key to a re-rating of the Indian stock markets so that they can take their place among the premier bourses of the global marketplace with a market capitalisation appropriate to its status.


(748 words)

By Gautam Mukherjee

28th September 2007

Also published in The Pioneer on Sunday, DIALOGUE in the AGENDA section, September 30th, 2007

This and all other essays in GHATOTKACHSERIES are copyright 2005-2007 by Gautam Mukherjee. All rights reserved,