Many economists are stunned by the sudden stock market rally that is evident in the Indian stock markets since the markets crashed in March last year. Nifty and Sensex both crashed to their lowest levels since 2016. The Sensex crashed by a whopping 3,934 points while the Nifty plunged by 1,1135 points.
However, since then the benchmark indices have both more than made up for the crash. Many investors and market observers are stunned by such a dramatic recovery despite the real economy being in dire straits. What explains the crash and the sudden rallies in the markets?
- Why are the markets rising?
There are three reasons that economists and market experts are citing as an explanation for the sudden rise of the benchmark indices during a pandemic.
- Firstly, several economists are of the opinion that the share price rally is a result of the markets delinking from the actual economy. They believe that the markets are operating independently of reasonable assessment, and argue that despite the sinking macro-economic indicators that can be seen during Covid and in its aftermath, the markets are rising unnaturally on the back of bullish sentiment and without any justifiable foundation in the current economic reality.
- Secondly, there is high global liquidity that is currently fuelling a stock rally across the world. Consider, for instance, that between the months of October 2020 to March this year, FIIs or foreign institutional investors pumped in a net of Rs 1.97 lakh crore in the markets which sent the Sensex running over 50,000. Similarly during April and May, DIIs, that is, mutual fund houses and insurance companies funnelled a total of Rs 9,669 crore.
- Thirdly, a positive earnings season was seen in the last quarter of FY2021 which has given a lot of hope to market speculators. Since the markets always tend to discount the present for the future, shares are rising in hope that the performance in future is likely to be far better than the current situation. Additionally, the second spell of lockdown was localised to a few states and wasn’t implemented across the country. What’s more, with the pace of the vaccination campaign picking up, market speculators are hoping that the threat of a third wave could be put off. Even if a third wave is to visit India, many market players are betting that its impact will be muted compared to the first and the second wave.
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