Evalueserve - The Indian Stock Market – Continued Boom or Impending Bust?

During 2003–07, India’s abridgement grew at an boilerplate anniversary amount of 8.6% and accomplished US $1,030 billion in the agenda year 2007. However, during the endure 16 years (1991–2006), the anniversary aggrandizement (as abstinent by the boilerplate broad amount basis [WPI]) has been about 6.67%. Given the accumulation amount and clamminess in the system, Evalueserve’s appraisal shows that the anniversary aggrandizement in India is acceptable to hover about 5% during the next 14 years. Assuming a connected barter rate, area one US Dollar equals 40 Indian Rupees, India’s abridgement is acceptable to be $1,490 billion in 2010 and about $5,040 billion in 2020 (in nominal terms). This implies that even afterwards accounting for inflation, there will be added than a five-fold access in India’s abridgement amid 2007 and 2020, which will accomplish India the fourth better abridgement in the apple afterwards the United States, China, and Japan.
During the endure 42 months, the Indian banal market, and in accurate the two indices—Sensex (Sensitive Index) and BSE-100, accept developed by about 290%, agnate to a accumulative anniversary advance amount of 36%. This can be attributed partly to the advance of the Indian abridgement and partly to the astronomic arrival of adopted bill in the Indian banal market, decidedly by Foreign Institutional Investors (FIIs). Given this backdrop, Evalueserve, a all-around analysis & analytics firm, afresh conducted a abstraction apropos the acceleration of the Indian banal market. This abstraction was absolutely arduous for us because the Indian bazaar is rather different with about no parallels. Nevertheless, we compared it to added booms and busts in arising markets and aswell acclimated backtesting and accompanying analysis. Our abstraction resulted in the afterward three scenarios:
Making banal bazaar predictions is consistently a actual chancy business. However, comparing and allegory arguments by beasts and bears, we accept accustomed at three acceptable scenarios, which are briefly discussed below:
First Scenario – Stock Market Crash
This book is acceptable to action if, because of a abrupt crisis of aplomb (e.g., because of a abrupt collapse of the accepted affiliation government in India), there was a flight of FII money out of the country. According to Evalueserve’s models and analysis, if US$ 12 billion of FII money were to leave aural a quarter, the banal bazaar would bead by about 30% and the Indian Rupee would abate by about 6%. This would betoken a akin of 14,000 for Sensex, which was the akin of Sensex about a year ago, if it was already causing all-overs a allotment of bazaar participants, regulators, and the Indian government. Fortunately, an actual 6% abrasion of the Indian bill would not be adverse for the economy, although it would advance to a bender of aggrandizement and accept a concise abrogating appulse on the accepted anniversary deficit. This could potentially advance to a abandoned aeon whereby added FII money leaves India, which in about-face would advance to added losses in Sensex, the abrasion of the Rupee, and even college inflation. Alternatively, a attenuated Rupee would accomplish Indian exports added aggressive and would advice abutting the accepted barter arrears in the continued run.
Second Scenario – Stock Market Bubble
This book is acceptable to action if the RBI and the Indian government are clumsy to barrier the massive arrival of FII money for addition year or two. This would forward the Sensex and the BSE-100 even higher, and added retail investors would jump in, thereby blame the P/E ratios of listed companies even higher. This bearings would be somewhat affiliated to the abreast archetype of the Chinese banal market, area companies are trading at P/E ratios of 50. So, admitting the accepted anxiety, there is acutely allowance for the Indian banal bazaar to bifold in the next year or two. Of course, in this scenario, such an “irrational exuberance” of the Indian banal bazaar may abide for some time, evocative of what happened in the US from the time if Alan Greenspan fabricated his comments in December 1996 to the time if the US bazaar comatose in April 2000.

Third Scenario – A Reasonable Market Rise
The banal bazaar continues to acceleration although at a “snail’s pace” (of 0–10% per year). Since the companies listed in the Sensex and the BSE-100 are acceptable to abound in acquirement at 15–17% annually (in nominal terms) and apparently added with account to accumulation margins, this arrangement ability self-adjust aural the next 2–4 years. However, during this period, the banal bazaar may abide brackish or go “sideways”, and could even accept top levels of volatility. Indeed, this book may be the atomic confusing for the Indian economy, and particularly, for the Indian banal market.
According to Dr. Alok Aggarwal, co-founder and administrator of Evalueserve, “The aboriginal book (i.e. the Sensex bottomward to 14,000 in the abreast future) has the accomplished anticipation of about 50%, admitting the added two scenarios accept an according anticipation of about 25% each. In added words, the accident is skewed on the downside.”

Disclaimer
Although the advice absolute in this article has been acquired from sources believed to be reliable, the columnist and Evalueserve abandon all warranties as to the accuracy, abyss or adequacy of such information. Evalueserve shall accept no accountability for errors, omissions or inadequacies in the advice absolute herein or for interpretations thereof.

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