- The Reserve Bank of India is helping to promote a world-breaking share market rally with record low interest rates and huge injections of liquidity - even as inflation threatens to break out its target range.
Investors are betting easy money won't end anytime soon, with the central bank governor Shaktikanta Das keeping a lid on dissent as he nurses the economy back from its pandemic lows.
Overseas funds have poured $7.2 trillion into the nation’s equity reserves this year and net inflows are expected to continue. The market for initial public offerings is on a tear, thanks to a frenzy of interest in startups, and India looks set to attract investors who are scared off by China's regulatory crackdown.
Retail traders are also piling in, along with Domestic institutions, contributing to a record $3 billion that was funneled into equity funds last month. While India has suffered a staggering toll with the coronavirus, individual investors by the millions are rushing into stock trading with savings built up during lockdown.
'The market is fueled by liquidity, which absorbs a fall, if any, said Ashish Chaturmohta, director of research at Sanctum Wealth Management Pvt. In Mumbai, I see more evidence of the violent crime in Mumbai. 'Enough money has been pumped in to support the economy and many sectors are seeing continued growth with great future prospects.
The benchmark S&P BSE Sensex has more than doubled from its Covid-induced nadir in March last year with gains continuing this month as it continues to generate record highs. The rally in August has made it the best performer among countries with an equity market capitalization of at least $3 trillion among primary indexes.
While an army of investors is wagering on further gains, there is no shortage of risks either.
At the top of the list is inflation, which broke above the target range of RBI in May and June before falling back below the top of the band in July.
Governor Das labels the recent spike as "transitory" but others disagree. Companies from the Indian unit of Unilever Plc to Tata Motors Ltd. are increasingly struggling to absorb rising raw material costs and one of the RBI's own rate setters has voiced'reservations' about continuing with the accommodative policy stance
The central bank is also aware of the potential risks of bubbles on the market. Cash injections that support the economic recovery can lead to unintended inflationary asset prices, the RBI warned in its annual report earlier this year.
The Sensex is now trading at 22.6 times estimated 12 month earnings, well above its 5-year average of 18.9. The MSCI Emerging Markets Index is trading at a multiple of 12.3.
Then there is the possibility of the Federal Reserve tightening its monetary policy sooner than expected, triggering rapid outflows of money from emerging markets including India.
And casting a shadow over everything is the virus.
after more than 430,000 deaths and 32 million infections, India's vaccination rate is increasing, allowing more of the economy to open and holding off market sentiment. But as the first country to be ravaged by the delta variant of Covid - 19, India has shown how quickly the outlook can change.
For now though, Das has said that the central bank is 'whatever it takes mode' to support the economy.
The RBI's main repurchase rate is at an all-time low of 4%, the government is committed to high spending and data from Bloomberg Economics show over liquidity in the banking system this month touch a record 8.6 trillion rupees.
'We believe that market index levels are sustainable, said Prateek Agrawal, Chief Investment Officer of ASK Investment Managers Ltd. in Mumbai. It is a year where the global economy is reflating and the policy environment is as yet favorable for equities.