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Time to think… - Views on News from Equitymaster
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  • Aug 18, 2003

    Time to think…

    Indian equity markets are on a journey up north, and since January 1st 2003, rise in the Sensex till-date has been 16%. And the reasons for this seem to be many. This article will highlight a few of them.

    One of the important reasons for increased enthusiasm on the bourses is the fact that the Rain Gods have been a bit merciful with us. Any improvement on the agricultural front is bound to have a positive impact on economic growth. This is because around 70% of India's population is dependent on agricultural or allied activities as a source of income. And when something is of benefit to them, India grows, and vice versa. The graph below indicates the correlation between agricultural and allied activities growth and GDP growth. Although we are on a move towards reducing our economic dependence on agriculture for growth, it will still take some time before we really turn out into a 'new' (services-driven) economy.

    Another reason for improved sentiment is the fact that the Indian economy is showing some signs of strength. India Inc. has been restructuring its operations over the last five years. Now, with demand gaining pace, companies are witnessing a faster growth in profitability when compared to revenue growth. And as India Inc. becomes operationally more effective and efficient, we are likely to witness better times ahead. This is not plain optimism. It is simple realism!

    The above mentioned reasons, combined with those like the government’s increasing initiatives on the infrastructure front, implementation of the reforms process, etc. are attracting increased FII inflows into the Indian equity markets, that is further strengthening movements on the bourses. Off late, there has been a high degree of correlation between FII inflows and the movement of Indian equity markets. The graph below depicts this relationship. However, what is more important is the fact that foreign fund inflows into the Indian equity markets have been steadily rising. While there was a minor diversion from the up trend in the initial phase of 2003, the tide has now turned in favour of increased inflows.

    June was witness to a record US$ 500 m of net investment and August, till-date, has almost reached the half of that. And from signs that emerge from the strength of these inflows, we are likely to witness better times going forward. The confidence comes from the fact that, this time, the strength in inflows seems more likely to be an effect of improving fundamentals of the Indian economy. More importantly, in relative terms, India is one of the fastest growing economies in the world, next to China.

    All said and done, we are still in the initial stages of improvements on the economic front. And the upcoming general elections add to the uncertainty. From here on, it is an onerous task predicting the markets in general, at least till the time we do not have a stable government at the Centre. After all, the ‘north’wards movements in Indian equity markets is highly dependent on the situation in the ‘North’ Block (New Delhi)! We have learnt some important lessons from our past, and now is time to put that wisdom into practice. Let us be wise before making our investment decisions, for that will determine where our future and that of India lies.



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