Investors beware

Last week, the Sensex crossed another milestone to reach a high of 32,000, while the Nifty climbed up to 9,891. These are record highs for both the indices and it seems that there is still a lot of vigour left in the bull run, given that many experts are anticipating the Reserve Bank of India to deliver a rate cut as India’s consumer price index inflation for June fell to an unprecedented 1.5 per cent. This, coupled with Federal Reserve Chair Janet Yellen’s statement that any monetary tightening in the US will be gradual, has led to an unusually high amount of Foreign Institutional Investors (FII) funds coming into the Indian markets.

However, many experts are striking a note of caution, indicating that this rally is largely on the back of excess liquidity that is finding its way into Indian markets rather than strong macroeconomic fundamentals. Even now, the road map for handling the twin balance sheet problem is marred with indecision and red tape. The twin balance sheet problem, in one part, is made up of a host of over-leveraged companies from the steel, power, telecom and other sectors that are failing to meet their interest payout timelines. The other part involves public and private sector banks whose net worth has seen massive erosion as NPAs worth over Rs 7 lakh crore continue to remain unresolved. Worryingly, many estimates show that they will only rise in the near future.

Further, fresh investments by the private sector slumped to a 25-year low in FY16-17, growing at a marginal 5.8 per cent, compared to the 9.4 per cent investment growth as reported by central PSUs. To equate the highs of Sensex and Nifty for robust macroeconomic fundamentals is a mistake that retail investors ought to be wary of.