A HIGH POINT

Sensex crosses 75,000 mark as investor confidence sustains. But there are concerns over valuations

ON TUESDAY, THE BSE Sensex went past the 75,000 mark, hitting a high of 75,124. While markets fell thereafter, ending the day down 0.08 per cent, the surge in the recent past has been staggering — the Sensex has risen almost 25 per cent over the past year. On Monday, the combined market capitalisation of the BSE listed firms crossed Rs 400 lakh crore. This rally is not limited to the larger companies — the BSE Midcap index is up almost 67 per cent over the past year, while the Smallcap index is also up 65 per cent.

There are several possible triggers for this rally. For one, economic growth momentum has been healthy. In the third quarter of 2023-24, the economy grew at 8.4 per cent, surpassing most forecasts. In its second advance estimates of national income, the National Statistical Office raised its expectations of growth for the full year to 7.6 per cent. There are some who argue that even this may well turn out to be an underestimate with stronger growth in the fourth quarter. The momentum is expected to continue holding up in the ongoing financial year as well, with the RBI projecting the economy to grow at 7 per cent. There are also expectations of strong corporate earnings in the fourth quarter (January-march) of 202324 — the earnings season will now commence — especially in sectors like banks and auto manufacturers. There are hopes that central banks in developed countries will begin to ease policy rates. For instance, the US Federal Reserve is expected to begin cutting rates in its June meeting. The minutes of the Federal Open Market committee (FOMC) meeting, which will be released on Wednesday, will provide clues. There is also the possibility of monetary policy easing in India with food prices likely to ease. Food inflation has so far been a source of concern — the consumer food price index stood at 8.66 per cent in February. However, the likelihood of La Nina, the chance of healthy output, raises the odds of food inflation declining. Considering that core inflation has eased to 3.4 per cent, falling food inflation would create space for the RBI’S monetary policy committee to cut rates.

With general elections around the corner, investors may also be factoring in prospects of policy continuity. Markets have in the past seen strong pre-election rallies. There are, however, concerns over valuations. The Sensex is currently trading at a price-to-earnings ratio of 25.54 — this is higher than the average between 2014-15 and 2023-24.