That said, it’s also true that the Sensex did better than other Asian indices and that outperformance is on account of the relief at the end of the uncertainty about the Budget. Not that there was anything in it to enthuse the market, but at least it’s over and done with and it could have been worse. Note the divergent reactions of the equity and debt markets to the Budget—while equities rose, bond prices fell and yields rose. One reason, according to bond dealers, is that the market doesn’t believe the government’s projected deficit figure. They think borrowing will be more than projected because subsidies will be higher.

Graphic: Yogesh Kumar/Mint

Which will prevail—the lure of higher growth or the fear of higher interest rates? Growth is likely to have the upper hand for now, not least because policymakers are still worried the recovery is fragile. Interest rates are still too low to have any impact on growth. What also matters is global liquidity. The current spurt in the equity markets can be put down to one simple fact: The Merrill Lynch survey for February had shown that investors were 12% overweight cash. As the concerns over Greece ebbed, that cash is being put to use. As for India, the survey also showed a net 59% of fund managers were underweight. While high valuations have been the deterrent so far, it does mean there’s plenty of room for investors to come in on the back of more positive sentiment.

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