Indian Market euphoria- Reality
There are 3 major reasons for strong euphoria.
1) Strong political leadership – I would not like to comment much about this as many people have written many things and it is an overstated fact. Strong leadership certainly helped in changing perception and confidence about India internationally and has resulted in FII pumping in more than USD 30 bn in Indian market.
2) TINA or TIFA (There is no alternative or There are few alternatives)- Global investors look for investment opportunities based on political leadership and stability, geopolitical situation of a country, attractive business policies with stable tax regime and simplified laws, growth opportunities and valuation. Prices of crude and other commodities have declined due to various factors including (apart from increasing USA shale gas production and its impact on crude oil prices) worries about slowing Chinese economic growth and possibility of Europe and Japan slipping into recession. The declining prices of commodities and natural resources have made resource based economies like Russia, Brazil, South Africa, Indonesia, etc. lose investors’ interest leading to the withdrawal of money from those countries. This is where India got lucky as it directly benefited from decline in oil prices. Besides, promise of economic reforms and political stability is raising high expectations about Indian economy and has become attractive for investors.
3) Comparative advantage vis-à-vis other BRICS countries – China’s growth is slowing and there is also geo political tension in Russia due to Ukraine crisis and sanctions impacting its economy. In the recently concluded presidential election in Brazil, incumbent president Ms Dilma Rousseff won 2nd term by very thin margin. Recently I met a Brazilian friend from Sao Paulo working in Moscow and he told me that re-election of Dilma Rousseff is bad for Brazil economy as she has neither done anything for business nor for workers and she is just a show piece and Brazil has lost a great opportunity for long term future growth and prosperity. He told that her win is a surprise as nobody expected. So this leaves investors with India only.
So I believe that markets have gone euphoric based on perception and developments outside India and things can change again with change in perception and outside developments (increase in prices of oil and other commodities which I expect) if things which are in government’s hands like implementation of promised economic reforms, more liberalization and action on ground implementation does not happen soon.