Irrational exuberance

Irrational exuberance

The stock market has been having a blast, but for reasons that have little link with underlying reality.

The benchmark Sensex closed Wednesday at a record 17,847, which is a huge 21.7% above its level three months ago. On 2 July, the Sensex closed the day at 14,664.

These three months have seen a global credit crunch that has not yet completely eased, a slowdown in local industrial production, a dip in demand for automobiles and consumer durables, slower growth in bank credit and a threat to exports from a strong rupee.

True, the Indian economy is growing at an impressive rate and the investment surge continues unabated. However, there is little in the economic fundamentals to justify a 21.7% jump in share prices.

The sharp cut in US interest rates has sent a flood of liquidity into emerging markets such as India. Easy money, asset bubbles, a growing trade gap—this is the mix that brought Asia to its knees in 1997.