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This week equity indices are likely to move northwards again. Massive liquidity support, primarily from abroad, may fuel a rally.

Some would like to believe that the rise in demand for the Indian equities after the US Fed move in easing liquidity on September 18 is a catch-up play by those who withdrew money from Dalal Street in July-August.

But market intelligence suggests that new groups of investors from different geographies have now been reaching out to taste a slice of the Indian pie for the first time. Also, some funds, which had preferred to stay in cash earlier, are timing their allocations now.

Is the massive increase in liquidity ($2.2 billion in six straight sessions) more a result of a herd mentality or a cathartic response than a function of considered and informed decision?

The short-term rate cuts by the US monetary authorities have brought about a paradigm shift for the global financial markets and liquidity flows. It obviously makes economic sense to invest in asset classes, rendered cheaper by the falling dollar, which beats the returns in the US.

You cannot fault equity portfolio managers if they think that India bus should not be missed now, risk notwithstanding. If liquidity influx is a result of compulsion of sorts, then it is difficult to talk the current momentum down in the short term.

Even though the surge in inflow to the equities adds to the RBI’s problems in handling rupee appreciation, upsetting the Dalal Street applecart does not seem to be the intention of the fiscal and monetary authorities.

Last week, as anticipated in these columns, RBI indulged in esoteric moves, including raising the cap on investment overseas by mutual funds, to reduce pressure of excess liquidity. But these measures may not cause reduction of money supply in the immediate term.

Domestic investors of all hues apparently are not carried away by the surging indices. Expectations are that Dr Y.V. Reddy and Mr P. Chidambaram may opt for more interventions in the short run.

Stock market has priced in a probable CRR cut of 50 basis points. It, however, does not expect a cut in interest rate, as demanded by a section of the industry.

Interestingly, the market has recently been doing some sectoral balancing ahead of quarterly results. IT stocks, which were hammered heavily in the initial reaction to the appreciating rupee, have last week been on a recovery mode.

As rupee closed the quarter at an average rate of 40.52 a dollar, closer to the average of 40.50 that the frontline IT companies pegged their earning guidance on, the market began re-rating the stocks. The textiles stocks also recovered somewhat factoring in the promised export subsidies by the Commerce Minister.

Response may be sent to jayanta_mallick@thehindu.co.in

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