The Sensex is up about 64 per cent since the beginning of this calendar year. And since its March 9 nadir of 8,160, it has risen a vertiginous 99.3 per cent. Last Friday it closed at a new high of 16,264. But with the 12-month trailing price to earnings (PE) ratio for the Sensex at 21.01, concerns abound that the markets may have run ahead of fundamentals, underlining the need for investors to exercise caution hereafter.

Liquidity-fuelled rally

The most important factor fuelling the current rally is the high level of liquidity, not just in India but across the globe. This liquidity tsunami is the consequence of all major central banks lowering interest rates and governments injecting massive doses of fiscal stimuli to stave off recession. Liquidity has found its way into various asset markets, including equities and commodities, raising prices.

In the leading economies of the West, both economies and markets appear to be stabilising. Demand has revived to some extent. However, both the US and European economies are still hobbled by high rates of unemployment. Nonetheless, with their home economies stabilising, foreign institutional investors’ (FIIs) risk appetite has improved. And with India being the world’s second-fastest growing economy, it is not surprising that a large portion of the emerging-market allocation has poured into this country.

According to Jayesh Shroff, fund manager at SBI Mutual Fund, “The real game changer in this rally has been FIIs pumping money into QIPs (Qualified Institutional Placements) and the secondary markets.” The net inflow of FII investments into Indian equities this calendar year has been $8.75 billion.

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