Easy money fuels world-beating rally at Sensex
Sensex doubled in over one year; analysts feel excessive liquidity can absorb any fall in markets
The Reserve Bank of India is helping to fan a worldbeating share market rally with record-low interest rates and huge injections of liquidity — even as inflation threatens to break back out of its target range.
Investors are betting the easy money won’t end anytime soon, with central bank governor Shaktikanta Das keeping a lid on dissent as he nurses the economy back from its pandemic lows.
Overseas funds have poured $7.2 billion into the nation’s equities this year and net inflows are expected to continue. The market for initial public offerings is on a tear, thanks to a frenzy of interest in startups, and India looks set to attract investors who’ve been scared off by China’s regulatory crackdown.
Domestic institutions are also piling in, along with retail traders, contributing to a record $3 billion that funneled into equity funds last month. While India has suffered a staggering toll from the coronavirus, individual investors by the millions are rushing into stock trading with savings built up during lockdown.
“The market is fueled
with liquidity, which will absorb a fall, if any,” said Ashish Chaturmohta, director of research at Sanctum Wealth Management Pvt. in Mumbai.
“Enough money has
been pumped in to support the economy and many sectors are seeing continued growth with great future prospects.”
The benchmark S&P BSE Sensex has more than doubled from its Covidinduced nadir in March last year, with gains accelerating this month as it continues to extend record highs. The rally has made it the world’s best performer in August among primary indexes of nations with an equity market capitalisation of at least $3 trillion.
Even as Asian stocks have witnessed a broad selloff this week — the MSCI Asia Pacific Index has lost more than four per cent — the Sensex is down just 0.2 per cent for the period.
While an army of investors is wagering on further gains for India, there is no shortage of risks either.
At the top of the list is inflation, which broke above the RBI’s two to six per cent target range in May and June before slipping back below the top of the band in July.
Governor Das sees the recent spike as “transitory” but others disagree.
Companies from the Indian unit of Unilever Plc to Tata Motors Ltd. are increasingly struggling to absorb rising raw material costs and one of the RBI’s own rate setters has voiced “reservations” about continuing with the accommodative policy stance.
The central bank is also alert to the dangers of potential bubbles in the market. Cash injected to support the economic recovery can lead to unintended inflationary asset prices, the RBI warned in its annual report earlier this year.
The Sensex is now trading at 22.5 times estimated 12-month earnings, well above its five-year average of 18.8. By comparison, the MSCI Emerging Markets Index is trading at a multiple of 12.3. Then there’s the prospect of the US Federal Reserve tightening its monetary policy sooner than expected, triggering rapid outflows of money from emerging markets including India.