Flush with inflow of foreign money, the benchmark Bombay Stock Exchange Sensex breached the 20,000 points mark for the first time since January 2008 and the broader 50-stock Nifty scaled 6,000 points on Tuesday.
Finance minister Pranab Mukherjee said he was “happy” that the key equity index had gone past the mark, while finance secretary Ashok Chawla told CNBC-TV18 that “there was no cause for anxiety or worry at this point”.
However, given that this rally has been powered by foreign money, which can be an unpredictable beast going by past experience, investors are buying some protection against a slump, technical indicators show.
On Tuesday, the Sensex, India’s most widely tracked index, gained 95.45 points, or 0.48%, to close at 20,001.55, crossing the level for the first time in 32 months. The Nifty index of the National Stock Exchange (NSE) climbed 28.6 points, or 0.48%, to close at 6,009.05.
The benchmark indices have crossed the so-called psychological barriers, but a closer look at the broader market reveals that the rally is being powered by only a few large-cap stocks.
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The BSE-500, which makes up 93% of that exchange’s market capitalization, closed flat, while the mid-cap and small-company indices fell by 1% and 1.3%, respectively.
Only 883 stocks closed above their previous high, compared with declines for 2,132 scrips. The NSE’s volatility index—the India VIX—rose 3.1% to 22.63, yet another indicator that people are not rushing in to buy, but treading carefully, analysts said.
“Nifty open interest put-call ratio (at 1.86) and implied volatility (at 22-23%) have gone up, which indicates that market participants (are) again getting cautious and buying some protection,” said Yogesh Radke, head of quantitative research desk at Edelweiss Securities Ltd.
Put-call ratio refers to the number of put options, or those that protect equities from a price dip, divided by the number of call options, or those used to profit from a price rise. Open interest put-call ratio calculates this metric for only those contracts that are outstanding or carried forward.
Of course, India’s robust economic growth indicators such as 8.5% estimated gross domestic product growth for 2010 and 20% estimated company earnings growth for the year have helped pull in money. These offer much more scope for stock prices in India to go up and put in the shade the low yields of securities in developed markets.
The benchmark indices are trading at 19 times the estimated earnings for 2010, but this hasn’t deterred foreign mutual funds and pension funds from pumping some $16.3 billion (Rs 74,491 crore) into Indian stocks in 2010 with one-third of this coming in the last two months alone.
The net result is that Indian stocks have gained some 11.3% in the past month, the best among so-called Bric (Brazil, India, China and Russia) countries.
In the same period, Brazil and Russia have gained some 5% each, while China is up 1.8%.
“Liquidity is abundant and it is difficult to argue with liquidity,” said Dinesh Thakkar, chairman and managing director of Angel Broking Ltd.
However, the pace at which this money has come in, with stocks rising for the last 10 out of 11 trading sessions, has made investors and analysts cautious.
Retail investors have shied away from the market while domestic institutions, too, have been net sellers in this rally. The latter have pulled out some Rs 20,286 crore in the past four months as they were uneasy about the valuations, besides having to deal with regulatory changes.
“I think it is a bubble,” Russell Napier, a consultant with CLSA, said in a Monday night lecture to analysts and fund managers in Mumbai. “While I am bullish on India over the long term, I would not buy Indian equities right now and (would) rather wait for prices to come down to their right levels.”
Pramit Bhattacharya, Ashwin Ramarathinam and Reuters contributed to this story.