MONEY

Sensex’s leap past 50K, followed by its immediate retreat, throws up a dicey situation

It was a momentous leap for the BSE Sensex in late January. The benchmark index of the Bombay Stock Exchange (BSE) crossed 50,000 points in intraday trade on January 21. However, the 30-share index retreated and closed below the psychological mark on that eventful day.

The Sensex almost doubled past the 50,000 mark in mere ten months, from a three-year low of 25,639 in March 2020 – battered by COVID-19 – to the all-time high of 50,184 in January 2021. It is another matter that after the stunning spring, the benchmark index has been on a downward spiral. The moot question now is what was driving the market, and where would it head in coming days.

Incidentally, equity markets globally have had a historical journey in the last one year despite a gloomy shadow cast by the viral pandemic. The Indian stock market too has been mirroring its global peers in these challenging times. A raft of good news – including opening up of the Indian economy after a series of stringent lockdowns, record inflow from foreign portfolio investors (FPIs), significant recovery in a few sectors, encouraging sales during the festive season, good corporate earnings and rollout of COVID vaccines and sliding infection numbers, among others – helped push stock prices sky high.

With the domestic economy opening up gradually, there has been steady growth in a few segments, fuelled by rising demand. The festive fervour further pushed up demand. Besides, Corporate India’s strong focus on cash flows and cost controls helped large companies slash debt. This is how big corporate houses have succeeded in improving their balance sheets in the absence of a broad-based demand.

A series of reform measures of the government helped rekindle investors’ – both domestic as well as foreign – interest in the Indian market. FPIs, in fact, have poured in over a record Rs 2.50 lakh crore into Indian equities since last April. The biggest driver of the market is indeed the huge investment by FPIs, with global markets flush with funds. Direct participation by retail investors has been another key reason behind the sharp market rally.

In fact, central banks across the developed world have eased monetary measures. Major central banks have continued to assure that monetary policy will remain accommodative for a considerable period of time as output gaps remain negative. Many of these central banks have lowered their respective policy rates to very low levels and have continued buying back bonds from investors, leaving global markets awash with liquidity. It is this easy money that is finding its way into emerging markets, including India.

Unfortunately, the exuberance in the stock market is shockingly contrary to the pain in the real economy. The much-touted rebound in demand is limited to a very few sectors of the economy. Barring these few sectors, there is deep distress across many other sectors. And this distress is well reflected in the output of eight core infrastructure sectors and in the figures of the Index of Industrial Production. The informal sector and the rural and agrarian economy are bleeding. A vicious cycle of joblessness, falling investments and wage cuts, among others, has badly battered demand.

So, the Sensex’s leap past 50,000, followed by its immediate retreat, throws up a dicey situation. Are investors able to see a bright future that could be eluding economists and analysts? Or is the market rally a mere result of easy money floating around the world that could be jolted as the reality of the real economy catches up with the market? The answer to these questions continues to perplex at the moment.


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