India is the world’s largest democracy and a member of the so-called BRICS group of emerging economies (Brazil, Russia, India, China and South Africa). There is a vast gulf between those to whom the emergence of India as a potential economic superpower has been kind and large numbers of the population who live in abject poverty.
The Indian Reserve Bank has been battling inflation and trying to prevent the Rupee from sinking without trace this year. The currency experienced a 28% decline in value against the US Dollar (making Indian-priced assets relatively cheap), but has rallied by ten per cent in recent months. Inflation is running above its target with consumer prices up by 9% year-on-year and wholesale inflation standing at 6.46%; well above the Reserve Bank’s “comfort figure” of 5%. This has led to a series of interest rate hikes, designed to cool inflation, which have taken the rate to 7.75%.
Against this backdrop, it may be surprising that India’s main stock exchange, the Sensex, has hit a new record high. The index has seen a rally of 19% over the low point in August and is at levels above the 2008 crash currently. Earlier in the year, India was amongst other developing markets, notably in Asia, to feel tremors from speculation that the Federal Reserve was about to “Taper” its asset purchase programme. The programme is designed to boost liquidity within the US economy, but inevitably, part of the money has wound up being invested in emerging stock markets where gains can be pronounced. Consequently, the Sensex will be sensitive to the “Taper” when it does eventually kick-in. Given that the Fed would like to see the programme draw to a close by the end of 2014, you could say that the writing is on the wall.
The situation is more delicate since the surge in market value has been led by a handful of (arguably) over-priced stocks. Speaking to the BBC, Ajay Bodke, head investment strategist with Mumbai-based brokerage Prabhudas Lilladher remarked: "This rally has been fuelled by an avalanche of global liquidity into emerging markets, after the reprieve by the US Fed as far as the US tapering plan goes". It has been estimated that nearly $2.6 billion was pumped into Indian equities last month.