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This week, equity market may see continuation of an upward bias. There is plenty of liquidity around – and more is coming – to support equity prices. The rally in the second half of May, after the elections results, suggests that a renewed force of liquidity has been driving the local market.

There are signs that late entrants, who hope that in the next seven months valuations would move to a higher range, are ready to pay a premium on the current levels.

A section of investors find headroom in the valuations of small- and mid-cap stocks despite risk of uncertain growth in return and lack of improvement in fundamentals.

The present volume of liquidity flow may continue till the Budget announcements in early July. According to market intelligence, expectations are so high that this outpour of liquidity may push the market ahead of its fundamentals.

According global fund flow monitors, funds focused on Indian equities have been receiving fresh money in the past few weeks. Advisors for overseas investors here have also been indicating that allocations have gone up – both in cash and derivatives segments.

Overseas participants in the current rally generally have a relatively limited time horizon of one year, but they have expanded investment targets to news stocks across the sectors and stocks along the scale of market capitalisation.

This shows fresh thinking in terms of strategy and risk taking. There is also a discernable tilt towards index and stock-specific derivatives play.

Compared with FII investment pattern in the past 10 sessions, the local mutual funds were slightly more aggressive in terms of net investments. The overall deployment of cash has gone up in May, says Mr Dhirendra Kumar of Value Research, the country’s mutual fund monitor. Some of the mutual funds were highly under-deployed in April with cash to the extent of 30 per cent. Though mutual fund investors have not started writing fresh cheques, NFOs are being lined up.

Participation of retail investors, local institutions, banks and corporates in this rally is also showing signs of a pickup.

Many in the Dalal Street community who were expecting a substantial correction after the initial euphoria over a poll verdict that paved way for a stable Government now foresee a correction after the Budget.

A surge in liquidity stands between the present broad-based buoyancy and a correction in tune with the fundamentals.

The road ahead in the current fiscal may be quite a bumpy for the corporate earnings growth. There may be serious and costly hurdles in projects and reforms execution.

Fund raising and the cost of borrowing are still areas of concern, industry sources suggest. The input costs, after showing a downward trend in the recent months, have again begun trending upwards. The relative strength of rupee against dollar has also not been a welcome aspect for the exporters.

While local primary equity market almost dried up, debt financing became too costly in 2008-09. Accessing foreign funds were even more difficult.

According to an SMC Capitals study, fund raising by Indian corporations abroad dropped 48 per cent in the previous financial year. April saw $0.30 billion collection through routes such as ADR, GDR, ECB and FCCB. This, if annualized, signified a fall of 98.29 per cent for the current fiscal.

Market players said they expect that if the momentum continues, fund raising at the local level would become easier in the second half of 2009-10. This may also help accessing funds internationally.

(Responses may be sent to jayanta_mallick@thehindu.co.in)

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