Bubble trouble for the Sensex?

By Reuters Staff
November 16, 2009

(Nipun Mehta is Executive Director & Head – India, SG Private Banking. The views expressed here are his own)

Nipun MehtaAt a Sensex level of around 17,000, are the Indian equity markets looking at the face of a possible bubble in the offing? Terrifying words, probably unjustified for a market which is still 20 percent lower than its all time peak touched in Jan 2008. Let’s look at it from different perspectives.

In the Indian equity markets, unlike in other global markets, it is commonly believed that the day the roadside vendor starts giving ‘tips’ or the day cheerleaders with pom-poms start appearing on business channels, the top is near.

This time however, we have not yet seen any of this fanfare amongst investors or business commentators. There is hence little reason to believe that a retail investor driven bubble is on the horizon. Nowhere close to it actually, since there has been very little retail or high net worth individual (HNWI) participation in the rally of the last 9 months.

What has clearly driven the markets are the Foreign Institutional Investors (FIIs) who have pumped in close to $7.4 bln in India in the last quarter raising their ownership to close to 19.2 percent up from 18.3 percent in the previous quarter. As per statistics available, FII ownership is also up by 2.5 percent from the March 2009 figure of 16.7 percent.

A large part of this is contributed by the dollar carry trade whereby FIIs raise funds at ridiculously low interest rates in dollars and invest it into a stronger currency viz INR. In the process they gain not just by the rising equity markets but also by the strengthening INR against $.

This is clearly similar to the Yen carry trade that happened earlier (whereby borrowings were in Yen at negligible interest rates) and which burst when the Yen — a strongly controlled currency — suddenly started strengthening. Can dollar carry trade stop? Can a similar bubble be building up in the $ carry trade as well?

Clearly the dollar carry trade can stop if interest rates in the U.S. rise. Can it happen in the short or medium term? Appears quite unlikely given the state of the U.S. economy and the statements the Fed has made in the recent past.

On the other hand, can the $ start appreciating enough for the stock market gains to be eaten away by a strengthening dollar? At least in the immediate term, this too appears unlikely. Considering the huge trade deficit, the Fed needs to ensure a weak dollar in order to encourage exports.

Effectively, there does not appear to be any bubble building in the Indian equity markets. What can however puncture the rally are the FII allocations to the emerging markets/India being realigned in January 2010 or the FIIs withdrawing big time under instructions by concerned central banks to use the borrowed funds for lending/investing within their own countries as opposed to help India or the emerging markets to benefit. Does that look possible?

(You can e-mail Nipun Mehta at: nipun.mehta@sgprivasia.com)


Looks like it. The market is surging on huge FII inflow and speculative buying, but what is the current SEBI stand on participatory notes?

Posted by zidane | Report as abusive

As Dollar becomes weaker, it makes sense for the FII Investors to slowly take the money out from Indian market and re invest in other assets. Imagine an american investor who invested 1000$ in a company stock, at 50 Rs conversion rate, he invested 50,000 Rs, now the stock rallied to 100,000 Rs and now at 40Rs per dollar conversion rate, he is making 2500$ out of it instead of 2000$.So some of the FIIs will realize the currency conversion profit they are gaining by selling foreign stocks during weak dollar regime. So, the chances of market picking up steam is pretty less. 18000 should be the highest point the market might touch…

Posted by Phanindra | Report as abusive

SEBI should not encourage FII’s by taking a lineant stand towards PN’s . This would lead to a bubble creation and finally the retail investors would be the ultimate looser’s once d FII’s start profit booking .Bcoz there are loads of bullish retail investors still investing in the market. A tough stand at this moment is expected at this moment from the market regulator .

Posted by Vipul | Report as abusive

It is very difficult to value stocks (or any asset) when we have easy monetary policies globally. No frontline stocks look attractive to buy and Valuation looks quite stretched especially Inflation and RBI’s monetary tightening are up in your front, but stocks yet not reached a bubble level. till now I won’t call it as a bubble. But if our markets move upwards in the same way the US market does in coming days I would call it as a bubble.stay invested in midcaps and take a look on dollar index always.

Posted by Suraj | Report as abusive

Play safe, as always. The recent 1500 point corrections seems good for the overall health, but one needs to be cautious. I feel the Sensex would continue to rise…

Posted by Ak | Report as abusive

Forget about your SEBI … only after the hot money has caused chaos will they wake up … . If you are sitting on profits, take them. If you are on the sidelines, sit tight. The uncertainty may be extreme but few things are certain -a) no commentator / analyst / I-banker / Private Banker / Broker has the slightest clue to what’s about to happenb) markets worldwide have been propped up by Central Banks by printing moneyc) Western Banks are using this interest-free money in two ways – first by buying US Treasuries (thus lending back to their lender, for a neat profit!) AND secondly to speculate worldwide and make a quick buckd) all this money printing has however given zero results as far as the real economy goese) Promoters are the surely making hay, by exiting their holdings and/or issuing new stockf) quarterly earnings are being doctored to serve the previous point and therefore earning figures a few quarters down will be terribleg)The musical chairs described above will have to stop sooner or later. Markets will sink and hopefully genuine efforts for an economic recovery would then be taken.

Posted by Bob | Report as abusive

Stock market rising and Gold rate are also rising…….Seems to be some thing strange

Posted by Kapil Lokhande | Report as abusive

There is never any sense in the way sensex moves, was it a justified thing when it went to 21k quickly? Is it justified that it came from 8k to 17k in matter of months?Has there every been a rally or fall which could have been predicted? Even if its a bubble … Can anyone guess if it would burst tomorrow or when Sensex touches 30000?No one can predict the unpredictable!

Posted by Raju Srivastava | Report as abusive

Market has many dimensions. Looking at one dimension, dollar carry trade and FII inflows… won’t help us reaching a conclusion.Last 9 months rally is mainly due to the huge stimulus packages from Govts across the world and subsequent spending Govt sponsored programs. Now we need to see actual recovery taking place. Even after 100% run up a bubble is not yet build as concluded by the article. We may see another 25 -30 % before building a bubble and final burst.


You don’t need a fancy degree from a fancy university to be an economic wizard. The poor, the farmers and the so-called illiterate people in India have been buying tons of gold each year (India is the world’s largest consumer of gold!) and look what their investment has delivered : appreciation, instant liquidity and tax free returns!Stock markets are clearly a licensed casino with favored players getting the inside benefits. People talk of a V shaped and W shaped recovery: what about an M shaped collapse?By 2012 the Mayan predicted end of the world could well be led by highly paid “suits” in investment banks who refuse to believe that nothing in the world is free – especially money.

Posted by Sanjeev Bhojnagarwala | Report as abusive

The present market rally is fuelled easy liqidity and multiple hedge funds playing a coordinated global game of shuffling money money between asssts.One can only ride it as long as it lasts

Posted by Raju Mandal | Report as abusive

Why this endless debate!What goes up, can’t stay up there permanently..It has no choice but to come down. It is like riding a Sine Wave.We should not forget that it is more about wealth ROTATION rather than wealth creation.

Posted by Anil | Report as abusive

What is the use of Central banks asking FII to come back to respective countries, when the economy and dollars are weak – professional contradiction to theories floated to frustrate every one leave alone the commentator.

Posted by leo | Report as abusive

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