The RBI has expressed a word of warning on how the Sensex has been on the rise, seemingly overlooking the actual state of the pandemic hit economy. This reflects the worry that the stock market is being manipulated by the big players while people’s attention is elsewhere. Or, perhaps, the investors, particularly the organised ones such as mutual funds and foreign players, realise that the fundamentals have not been as affected by the pandemic as might be believed because many sectors have successfully transformed their functioning.
Traditionally, the Indian share market has operated on a narrow base, with a large section of the investing public choosing to opt out. With the relative expansion of this base, the number of investors has increased. It also has to do with the poor returns on other investments, from the safe FD in banks to property, land and gold. In that context, having greater investment in growing enterprises should lift the spirits of the business community. At the same time it could just reflect transfer of funds from the businesses that are non-functional at the present.
The upbeat mood could also be explained on the basis of external factors such as the planned stimulus in the US by President Biden. The various rating agencies are also not predicting any serious setback. In fact, the expectation of many international organisations that India’s GDP growth may remain healthy has also something to do with it. While the politicians may be criticising the vaccination effort, business is seeing the healthy numbers, even when they are low on some days.
Quality of governance has also much to do with it – particularly the determination to introduce reforms. Holding out against the enormous pressure put by farmers’ unions against the reform laws gives those looking to see private sector investment in potentially lucrative areas cause for optimism. Investors are very likely taking positions now – at increasing prices – in the expectation that there would be further development and growth oriented governance in the future. The manner in which infrastructure projects have been persisted with despite the lockdowns also indicates a more healthy business environment.
At the same time, though, a really healthy market requires a substantial number of IPOs every year that the base level investor could put money into. This is perhaps expected from the number of PSUs in the privatisation pipeline. IPOs would also keep coming if a substantial number of start-ups do well in a buoyant market. Much will depend on consumer demand in the coming months – India’s middle class is just waiting for tourism and associated sectors to open up. So, there might be more than just speculation that is boosting the share market at the present.