Why are Indian markets rising?

After several attempts in previous weeks, the benchmark 30-share Sensitive index breached the historic 8,000 mark last week, closing at a record high of 8,060.01. The Indian markets have now gained 21 per cent in this year, led by a surge in overseas fund buying and strong projected corporate earnings.

However, as with any new level, there will be new theories of which way the markets would go from here. Considering that the macro-economic picture is positive, with a GDP growth rate of 7 per cent set to be maintained, other market fundamentals are also in place.

• The Sensex journey: From 1000 to 8000
• The rise of the Indian stock markets

From a technical viewpoint, the Sensex closing above the 7,850 level is a strong positive, so there appears little to worry about. Many fund managers, brokers and analysts say the markets will take a breather, correct a bit to get ready for a move on.

What has brought the markets to these levels?

The bull run that sustained from 6,118 levels in March 2005 has been completely driven by overseas funds buying into Indian stocks. In addition, there's been a range of new funds from South Korea, Japan and the United States that have bought into the markets even at higher levels. Overseas fund net investments stand at $7.93 billion to date 2005, up 76 per cent over the year, against a level of $4.41 billion the previous year.

"The interest which foreign funds have shown in the Indian markets is for real and most importantly, sustained. The clear signal is that valuations look attractive and second-quarter corporate earnings for Indian companies look strong," said Shitin Desai, executive vice-chairman of DSP Merrill Lynch.

According to Bharat Shah, CEO with foreign brokerage firm ASK Raymond James, Indian companies have in recent times proved their worth in the international arena. Their ability to adapt to changing conditions and emerge strong has boosted investor confidence.

India amongst the most attractive emerging markets

Fund managers are of the view that India is amongst the most attractive of the emerging markets, alongside Taiwan.

"Our own assessment is that within the emerging markets, we still are amongst the most attractive," said Kavita Hurry, CEO and managing director with ING Vysya Mutual fund, a leading private sector mutual fund.

India in terms of market capitalisation is the fourth largest in the emerging markets segment (behind South Korea, Taiwan and Saudi Arabia) and 15th overall at $449.8 billion.

While South Korea and Saudi Arabia have outperformed India year-on-year since August 2004, in terms of the political and economic reform climate, India is placed higher.

The fundamentals story is strong

When the markets peaked above 8,000, the Finance Minister P Chidambaram last week said there was no worry about a stock market bubble and despite the strong rise, stocks did not appear to be overvalued. Price/earnings ratios -- a common measure of value -- were around 14.5 to 15.5 times, Chidambaram told NDTV television.

These levels suggest "there is no reason for concern or worry," he said.

India's economy is forecast to grow by about seven per cent for the financial year ending March 2006, according to the July quarterly monetary and economic policy assessment from the Reserve Bank of India.

"The fundamentals show no risk. There could be a small correction. . . but frankly there is no magical difference between the markets at 7,900 and 8,000. The fund flows remain strong and valuations do not appear stretched at this stage," said R Balakrishnan, director of Chennai-based Parallex Consultancy Services Ltd.

The clouds of uncertainty over global oil prices appear to have blown over. Oil refiners stand to gain following the government's decision to increase fuel prices by seven per cent earlier last week to align them more with soaring global prices.

Atul Hatwar, dealer with brokerage Crosseas Securities, said that in the wake of the devastation caused by Hurricane Katrina, the US Federal Reserve Board could keep interest rates steady rather than raise them as it had been doing. "This should keep fund flows to emerging markets intact," said Hatwar.

. . . and risk factors are limited

According to Hurry, most of the risk factors appear limited at this stage. "I am cautiously optimistic about the markets at this stage. There could be a small correction of 300-400 points, but the positives are strong in terms of liquidity and fund flows," she said.

The monsoons have been steady across the nation and the worst behind us. Fund managers assess that political uncertainty may not be a big issue. Even if were to strike, India's reform process will not turn back and GDP growth would be at 6 per cent. If there is no uncertainty, the growth rate will be a strong 7-7.5 per cent.

Corporate earnings are seen as another positive trigger in coming months, with the software, automobile and banking sectors expected to perform well.

In a sustained bull-run, a concern retail investors have is of the possibility of a fraud. This fear is not unwarranted, as each time when the Indian markets rose sharply in 1992, 1996 and 2000, securities frauds emerged and drove small investors and fortunes out.

The Reserve Bank of India has asked banks to monitor the end use of funds lent by them to corporates, to curb any malpractices.

The market regulator -- the Securities and Exchange Board of India -- may not be completely proactive at each stage, but has its monitoring system in place. Systemic changes over the past four years also make the Indian markets amongst the safest amongst emerging markets.