What a historic week it has been for the Indian Stock Markets! So many firsts… Sensex has zoomed past 51000, Nifty has breached the 15000 mark, market capitalisation of BSE-listed companies crossed the historic Rs.2 lakh crore.

The two major events of the week – the Union Budget FY 2021-22 and the RBI Monetary Policy – both acted as a catalyst to the already buoyant investor behaviour in the stock markets. Sensex has jumped from 40000 to 50000 in just about three months. And over 5% since the Budget earlier in the week.

From the lows of March 2020, the stock markets have shown sharp recovery and indicating towards the trust and confidence on India’s sustainable and robust long term growth story. The post pandemic rebound is expected to be the highest and sharpest for the emerging economies- with India leading the foray. The chart below shows the journey of the Sensex over the years.

A V-shape sharp rebound is visible from the chart above. Also, the Indian economy is staging a V-shaped economic recovery. It may be seen that each sharp upturn is followed with a steep slide as well.

So, is this euphoria sustainable? Is it completely attributed to the plush liquidity available within India and outside in the global economy? Is it truly supported by strong fundamentals of the economy? Is such high volatility the new normal? Or does this melt-up a big indication for an upcoming meltdown?

Melt up is a financial term that refers to a sharp improvement in the performance of the stock market due to reasons other than fundamental improvements in the economy. The improvement in investment performance is mainly driven by investor sentiment, where investors flock into buying stocks because they notice the market rising, and they do not want to miss out on the opportunity.

Although most investors may be tempted to profit from the rising positions in the stock market, they should also understand that such movements last in the short term and the rising performance would be followed by a meltdown. Investors who let melt ups influence their decision are driven by emotions, and it is best to focus on doing due diligence to understand the actual value of an investment.

As  investors, let’s make hay while the sun shines. There is absolutely no second thoughts that the impetus announced by the government in the budget along with appropriate support from RBI will ensure a stable growth path ahead for our economy. So, we may not witness a melt-down per se, but what we may witness are few corrections coming up in the market, but that should be more of an opportunity to enter this long run rally.

The long run threats – inflation, political instability, economic factors, etc may cause a blip but are more than overcome by the strong robust positive factors working for the economy. Pandemic situation seeming under control, mega economic packages from the Government (Atmanirbhar Packages – over 29 lakh crore) during 2020, the strong impetus announced in the budget with focus on growth revival, strategic support from RBI to ensure plush liquidity in the system, improving high-frequency indicators–inflation, rural growth, pick up in exports, PMI, GST and tax collections, green shoots in capex cycle – point to strong macro recovery ahead.

So my dear investors, capitalize on the existing rally to book gains. Though, for a long-term perspective, it’s better off making decisions based on market fundamentals. It is critical to analyze both qualitative and quantitative data to evaluate the financial health of a company and the economy before parking the funds for a longer term. Be it short term or a longer term, it seems investors in India have a long night for party ahead!

Dr. Tarunika Jain Agarwal Ph.D.

Alpha Research