Indian Stock Exchanges are reaching soaring heights day by day, the Sensex having crossed 15000. Though it is somewhat an obscene term, there is a phrase in Sanskrit and Telugu which reflects the current position. Paraspara kuca mardanam which on approximate translation means two persons massaging and pressing the breasts of one another to get mutual satisfaction.
Swelling stock exchanges attract float funds from abroad with investments being made on short term for speculative purposes, without considering the production and marketing strengths and weaknesses of Indian businesses. This pushes the indeces further.
The brokers and the speculators operating in the Indian Stock Exchanges (both the Indian and the foreign) keep the share prices artificially high.
The speculators borrow heavily from Indian Banks ostensibly for industrial and commercial purposes, but divert the funds to the Stock Markets, as there is no proper supervision.
The Banks in turn owing to good demand for credit, keep interest rates high both on deposits and advances.
When Banks in India pay high interest rates, NRI and PIO funds flow to India abundantly. Besides foreign institutional funds rush into India. This raises the demand for Indian Rupee and the Indian Rupee appreciates independent of the export competitiveness of Indian exporters. The Petroleum Sector importers such as Reliance will also be happy because a strong Rupee reduces costs of their imports. A stage may reach when it will pay more to import than produce indigenously.
Then we cannot expect RBI to keep interest rates artificially low. Thus Indian stock and money markets are caught in a vortex of a typhoon.
The small investors have to be cautious while buying and concentrate more on fudamentals and physicals.
ADDED ON OCT. 21, 2009
The markets have completed full circle.
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