Sure, the current figures show the rally is driven by excess liquidity. Foreign institutional investors, flush with funds and optimistic again about Asian markets are buying Indian stock aggressively. Domestic market traders caught short have had to follow suit. But all these buy signals still beg the question why. Why has it taken FIIs to scent the opportunity provided by the Jayalalitha effect which wiped Rs 70,000 crore off the market? Why has the rally spread to a wider range of stocks than moved up in the immediate post-budget period thanksto the policy thrust behind sectors like software, housing, cement and steel? Not only are more A group shares involved in the current rally, more investment is going into B counter stocks judging by the numbers hitting circuit-breakers.

So, whatever happened to the Pokharan-sanctions effect, to political uncertainty, economic sluggishness and the just-out grim statistics for industrial production for last year? Some partial answers are possible. To take political factors first, it is not so much that political outcomes are no longer important in investment calculations but that with the smooth passage of the budget and the six-month hiatus before a new government comes to power, market-players know what to expect and do not anticipate major policy shifts. As one marketman put it, for the next six months at least, politicians will not be mucking around with the economy. So market exuberance is based in part on a predictable economic policy-environment.

FIIs have taken the BSE index back to the levelsreached before Washington imposed sanctions, pumping back as much or more than they took out of the stock market at that time. This suggests that the Indian economy and corporates have managed by and large to ride out the effects of sanctions.

Despite the bad news from the troubled industrial sector, it also seems likely FIIs see signs of recovery in the economy and, unlike many domestic players, can afford to make early market moves. In any case, economic fundamentals remain sound and while government instability over the last three years may have prevented the economy from achieving its full potential, a growth rate of between 5 and 6 per cent has been maintained.

It could be FIIs are also betting that the revival of growth in East Asia will improve growth prospects in the Indian economy around the time that a new government will be in place at the Centre. Rational or irrational, the charge of the FIIs is improving market psychology as few things have done for a long time. As the stock market rises,domestic expectations about the future tend to improve. But it is as well to remember that an FII stampede can change direction over-night and leave havoc in its wake.