The Sensex, the benchmark stock index in India, has hit a record high, after months of capital exodus amid concerns regarding the country’s economic growth turned into a significant inflow of foreign capital.
This remarkable turnaround surprised many analysts who had expressed worry at the rupee’s recent record lows and a looming crisis of confidence.
During today trading the Sensex reached 21,293.88 before closing at 21,196.81. It had last reached its previous high in 2008 (21,206) during the stock market boom.
Since the US Federal Reserve surprised many in the market by delaying tapering its economic stimulus package (injecting $85 billion into the financial system every month), foreign capital inflows into India have totaled approximately $3.5 billion.
Is the Sensex turnaround sustainable?
However, several experts wonder whether this sudden turnaround will persist. The BBC quotes Phani Sekar, who works at Angel Broking as a fund portfolio manager, who said “I am not too pleased with the way fundamentals are shaping up.”
He also mentioned that the rally has been driven by just a handful of stocks which are “hopelessly expensive”.
Despite today’s rally and record high, the Sensex is still the 4th worst performer in Asia so far this year (in dollar terms).
In order to control inflation, the Reserve Bank of India raised interest rates by a 0.25% percentage point, the second increase in two months.
For a country that appears to be running out of steam, raising interest rates is likely to slow things down even more.
The World Bank reduced its forecast for Indian GDP growth to 4.7% in this fiscal year (ending March 2014), lower than the previous year’s 5%, which was the lowest in ten years.
Sensex shares are comparatively expensive
Reuters India says that Indian shares are very expensive compared to those traded in other stock markets in Asia. Shares trade at approximately 14.4 times trailing 12-month earnings, versus 10.6 times in other Asian emerging markets.
Experts say that as this rally is completely reliant on fund flows coming from abroad, investors should remain vigilant. If this inflow of foreign capital dries up, the effect on share prices would be considerable.
The Bank of India and Bank of Baroda both saw increases in their share values of 12% and 11% respectively. Neither bank is in the Sensex list of 30 companies. Their latest financial results show an improvement in asset quality.
These two banks, and several other state run financial institutions have been badly affected by a rise in loan defaults and worsening asset quality, both consequences of an economy that is losing steam.
These better-than-expected results coming from banks have encouraged analysts who predict that the State Bank of India, the largest lender of assets in the country, may also report (in mid-November) fewer bad loans and deteriorating assets.