By C.P. CHANDRASEKHAR
When a global expansion in liquidity leads to a surge of capital inflow into the country, it does more harm than good.
INDIA’S stock market recovery over the past six months is a bit too remarkable for comfort. From its March 9, 2009, level of 8,160, the Sensex at closing soared and nearly doubled to touch 16,184 on September 9, 2009. This is still (thankfully) well below the 20,870 peak that the index closed at on September 1, 2008, but is high enough to cheer the traders and rapid enough to encourage a speculative rush.
There are two noteworthy features of the close to 100 per cent increase the index has registered in recent months. First, it occurs when the aftermath of the global crisis is still with us and the search for “green shoots and leaves” of recovery in the real economy is still on. Real fundamentals do not seem to warrant this remarkable recovery. Second, the speed with which this 100 per cent rise has been delivered is dramatic even when compared with the boom years that preceded the 2008-09 crisis. The last time the Sensex moved between exactly similar positions it took a year and 10 months to rise from the 8,000-plus level in early 2005 to the 16,000-plus level in late 2007. This time around it has traversed the same distance in just six months.
With firms just looking to exit from a recessionary phase, this rapid rise in stock prices cannot be justified by movements in sales and profits. In fact, as Business Line noted in its editorial on September 9, 2009, the price to earnings ratio of Sensex companies now stands at 21, which is much higher than an average of 17, which itself many would claim is on the high side.
Those comfortable with the market’s rise would of course argue that investors, expecting a robust recovery, are implicitly factoring in future earnings trends, rather than relying on earnings figures that are the legacy of a recession. That would be stretching the case. Once the next round of arrears has been paid, the once-for-all component in the stimulus that the Sixth Pay Commission’s recommendations provided would wane. With the deficit on the government’s budget expected to reach extremely high levels this fiscal, a cutback of government expenditure is likely.