Time for caution

Higher valuations will not support a sustained rally

Business Standard Editorial Comment | Mumbai
Last Updated at November 26, 2021 03:30 IST

Indian equities have seen a correction over the past one month, which has, so far, pulled the benchmark Nifty down 5.7 per cent from its record peak. This follows up on a remarkable rally, which pushed the markets up by 130 per cent from a panic low in late March 2020 during the first lockdown. In addition, there has been frenetic activity in the primary market with a multitude of issues getting over-subscribed and listing at a premium. The rally was backed by easy money conditions, with most central banks including the Reserve Bank of India (RBI) maintaining a combination of high liquidity and low interest rates. It was also marked by a sharp improvement in corporate profitability starting from the second half of 2020-21. This is due to low base effects, low interest rates, and tax cuts, despite weak consumption demand. The recent correction, however, carries signs that it could be the harbinger of a deeper trend reversal. Foreign portfolio investors (FPIs) have been heavy and consistent buyers through the last fiscal year, with most of their advisories signalling “overweight” on Indian equities. They bought over Rs 2.75 trillion worth of equities in the last fiscal year.

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