Why is Sensex Rising ?

Dec 6

The equity markets appear to be in the grip of a bull run. Last week the sensex touched an all-time high of 63 K, 23% up from the low of 51 K in mid-June. The sensex keeps rising, despite the fact that global stock indices are down almost all over the world with the MSCI all country stock market index down by 17% for the year.

The US S&P 500 index is down by 16%, while Nasdaq by 28%. Stock Euro 600 and Shanghai Composite are also in red, down 10% and 15% respectively. But India's Sensex and Nifty in contrast are up by 5.8% and 5.5% respectively.

The recent NSO data show a weak 6.3% growth, and inflation is still above the RBI's comfort level. RBI may raise repo rate once again by 0.25% in addition to 1.90%.

People blame share markets for showing little correlation to the overall health of the economy and for operating in a world of their own insulated from what is really happening in the economy.

It certainly appears irrational, but is it really so? Is there any flaw? But when we fathom a little, we find some solid reasons for this bull run.

The year 2022 started well, but quickly foreign markets went in shambles with the outbreak of Russia-Ukraine war, that led to price rise and inflationary tendencies. To combat high inflation, central banks all over the world raised interest rates that entailed slowing down of economic activity. The world is in the grip of recessionary fears.

India's retail inflation was 6.77% against the global average of 8.8% predicted for 2022 by IMF, a jump from 3.42% in 2021. India did manage inflation better, despite its rupee losing strength against US $. Continuous investments in infrastructure for better roads, ports, airports, trains etc are enhancing productivity, and the overall GDP growth.

Moreover, Covid-restricted China appears to be unsafe and risky for further investment by foreign portfolio investors (FPIs). After pulling out a lot of money in mid-2022, the FPIs are back in a big way.

But that's not the sole reason. Only FPIs are not the factor that propels the growth of sensex. In fact, net foreign investment in the share markets this year, despite their return, remains in the negative. Our domestic economy acts as a cushion against the global blow.

The fact is that domestic money is entering the share markets in a big way, either through systematic investment plans (SIPs) or mutual funds (MFs). Investment habit among people, especially younger generation is growing fast. The low returns on post office and bank deposits are also compelling common households to invest in share markets.

The spread of the equity culture augurs well for the overall growth of economy. Let the war find an early resolution that will help bring a new sunshine for the share markets and global economy in 2023, a year of mutual growth and peaceful coexistence. Amen!