Indian stocks surged on Tuesday to take the benchmark Nifty to a record high. The expectation is that the electoral success of the Bharatiya Janata Party (BJP) in the recent assembly elections, particularly in Uttar Pradesh, will make it easier for the Narendra Modi government to pursue economic reforms. It will also eventually allow the BJP to consolidate its position in the Rajya Sabha.
Although bulls are in charge and factors such as capital flows and global market conditions are favourable, markets will be keenly watching the stance of the US Federal Reserve, and it remains to be seen for how long the rally is sustained.
Higher levels will require support from earnings, which have remained lacklustre for some time. The market will also not have the support of monetary policy in the near term as the latest inflation data showed signs of hardening price pressures.
Further, there is no solution in sight to the twin balance sheet problem which will continue to impede economic revival.