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Don't go overboard

Jun 6, 2003

The Indian stock markets have been buoyant in the last few weeks and the rally seems to be broad based. Apart from volatility seen in sectors like software and banking the rally has been spread across sectors. Strong gains are seen especially in energy, banking and auto ancillary sectors. However, one needs to carefully look at the reasons for this rally and try to analyze whether there are any fundamental changes that are precipitating this rally.While most of us know that the long-term economic prospects of the country are promising, one cannot rule out the role of monsoons in the short-term. Hence before we go over board with the rally, we need to face the facts. The lag effect of poor monsoons in 2002 is reflected in slower growth in industrial sector in the March quarter. Going forward, one needs to take into account the fact that monsoons are already late.

If the delay translates into an average monsoon, near term growth prospect of the economy could be hampered. Besides, the reason for apprehension is that the global economy is still in the throes of a slowdown and there are no clear signs of a rebound in the short term. To this extent also, one needs to be cautious. However, FIIs have been showing optimism towards the Indian markets and not without a reason. The Indian market is still one of the most undervalued ones. As a result, FII inflows have remained buoyant. One will not be surprised if the trend continues.

The Indian economy has benefited immensely from more than a decade of reforms. Economic reforms are still a priority of the present government and it has made significant progress on this front. While this a positive for the economy, not all companies will benefit. Even among sectors, there are leaders and laggards. The current movement of certain sectors on the stock markets (banking) indicates a kind of unrealism. Hence investors need to be more cautious before they make their investment decisions.

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