Road to recovery

The fact that the Indian economy is on a major recovery path is reflected in the country's stock markets. Record rabi foodgrains output, ...

The fact that the Indian economy is on a major recovery path is reflected in the country’s stock markets. Record rabi foodgrains output, expectation of normal rainfall, signs of a sharp industrial recovery and expected economic growth of 7 per cent for the entire fiscal all augur very well for the bourses. Morever, economic fundamentals remain strong. Growth impulse coupled with record low inflation rate of 2 per cent, strong forex reserves and stable rupee make the economic scenario increasingly sustainable. The domestic economic exuberance is also supported by favourable global trends.

Asian economies have rebounded, commodity cycles have bottomed out, and contrary to the earlier expectation, the US economy the engine of global economic growth has continued to retain its growth momentum without any signs of overheating. The global economy has entered a new economic phase characterised by sustained economic growth, low inflation, low unemployment and a lower level of interest rates with advances ininformation technology and telecommunications contributing to the unprecedented productivity gains. Indian economy — being much more closely integrated with the global economy — now has been reacting to the global forces much faster.

Not only has the Sensex gone up by more than 50 per cent since January, but the stock market rally has encompassed a much wider spectrum of stocks covering more sectors and a wider range of market capitalisations. It is this feature of the current rally which makes it more reassuring for the small investors.

The corporate sector has poured out healthier quarterly results reinforcing the higher level of business confidence. Both the consumer durable and capital goods sectors have shown double digit growth.

Moreover, the recovery in the international commodity prices and domestic industrial upsurge have triggered a sharp upturn in the stock values in sectors like petroleum, petrochemicals, cement, steel, aluminum, engineering and the automobile industry.

The cyclicalstocks that were beaten down heavily in the aftermath of the Asian crisis have regained their valuations. Information technology, pharma and FMCG stocks remain stronger on excellent earnings growth. The Indian stocks still offer relatively cheaper valuations to the FIIs. Strong domestic economic forces, favourable global milieu, industrial resurgence and corporate performance will keep the stock market firm and buoyant.

The rally in the stock market has also given a strong boost to the mutual fund industry. The net asset values (NAVs) and the market prices of the equity-oriented mutual funds (MFs) have shown a sharp rise. This has had an influence on investor-confidence and resulted in handsome growth in MF mobilisation. In light of declining interest rates and rising stock prices, the investors’ preference is shifting to MFs. The higher activity of MFs in the stock market and their increasing mobilisation are going to further increase the demand for under valued stocks. In addition to the institutionalactivity in the stock market, the current trend has also revived the individual investor interest in the stock market. Demat of a large number of stocks has been a boon to investors and has facilitated institutional investor activity. The stock market today is, therefore, more transparent and efficient. Its impact on industrial economy and the current rally should promote higher investment activity and accelerate investment growth.

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The author is Chief General Manager, Department of Fund Management, UTI