Firecrackers or dark Diwali: Will Raghuram play party-pooper on D-Street?

Benchmark indices are close to hitting all-time highs, fuelled by aggressive buying by FIIs who have pumped in over Rs 13,000 crore in the last 16 trading sessions.
The 30-share Sensex crossed the 21,000 mark for the first time in January 2008, the year of the financial crisis that sparked a run on markets globally. The all-time closing high for Sensex is 21,004, which it hit on November 5, 2010; while its intraday high is 21,228.
FIIs are renewing their interest in India and have invested Rs 13,500 crore in the last 16 trades, the highest monthly net investment by foreign investors since May 2013, ET reported.
Some experts are of the view that the markets have rallied ahead of their fundamentals as nothing has changed on the economic front in the rising interest rate environment. It’s only FIIs that are fuelling the rally, say experts.
The markets are close to their all-time highs, and this is a disconnect with the country’s macro economic situation.
Inflation is still high which might make the Reserve bank of India ( RBI) raise policy rates again when it meets tomorrow (October 29).
“The only thing that is driving the market is FII inflows and they continue to be strong in September and till date in October,” said UR Bhat, MD, Dalton Capital Advisors.
“So, as long as that continues, the macro economy will not matter all that much but at some stage these things will come back to haunt us – the state of the macro economy, the state of interest rates, the twin deficit and all that will come back to take the centre stage with dysfunctional politics,” he added.
As of now, it is party time because FIIs continue to be attracted to India, partly because there is a delay in the tapering, added Bhatt.
The reasons for this FII-led rally are both global as well as domestic. On the global front, the market is cheering the fact that there is increased speculation the Federal Reserve will delay scaling back its stimulus for several months.
Apart from that, one of the primary reasons which can be attributed to this flush of liquidity from the FIIs is the fact that the US government sealed a last-minute deal to avoid a debt default.
On the domestic front, the Reserve Bank has initiated a string of measures to maintain liquidity in the system and hope of a Narendra Modi-led government winning the next general elections has fuelled sentiments.
“For India too, a deferred QE unwinding is good news as FII flows will remain positive, helping the government to fund a large current account deficit (CAD) and stabilise therupee,” said Vinay Khattar, Head of Research (Individual Client Research) at Edelweiss Financial Services.
The next big trigger for the Indian markets will be the Lok Sabha elections in 2014. Before that, the markets will pay attention to the outcome of the upcoming assembly polls. The electoral battle between the two national parties (Congress and BJP) is likely to be a heated one.
Khattar is of the view that the BJP has gained some momentum, thanks to naming ofNarendra Modi as the party’s prime ministerial candidate, but says it’s a bit too early to predict the result of the Lok Sabha elections.
Among the top brokerage firms, Deutsche Bank last Friday raised its December 2013 target for the Sensex to a record 22,000 points from 21,000. “We are raising our December Sensex target to 22,000 premised on our expectation that the pace of negative news flow over India and excessive investor pessimism may be receding,” said Abhay Laijawala , MD & head (research), Deutsche Equities.


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