Behind the equity rally
Indian equities have seen a splendid rally over the past three trading days. Part of this is because of the way global markets suddenly appear unfazed at the prospect of higher US interest rates as well as the fact that global crude oil prices have moved upwards of $50 a barrel. The curious positive correlation between global oil prices and global equity prices continues.
Three local factors have also come into play. A strong monsoon forecast after two consecutive droughts is expected to ease pressure on the rural economy. The further moderation in inflation will create space for the Reserve Bank of India to reduce interest rates. The current round of corporate earnings show welcome signs of an expansion in profit margins, once investors look beyond the banking mess.
Each is a fragile assumption. The Modi rally petered out many months ago. It is not clear yet whether this week is the beginning of a big move in equity prices.