Sensex 11K, now a rearview reality

MUMBAI: It had to happen some time, and March 27 was it. The Bombay Stock Exchange Sensex, which has been defying gravity for months now, crossed the 11,000 mark decisively on Monday, closing 79 points above that level. The more broad-based Nifty did its own number, closing at an all-time high of 3,321.65. Twelve other indices also hit their life-time highs.

Net result: investor wealth is now at a dizzying Rs 29.49 lakh crore. The moot point: how long will it be before investors try to convert paper to cash and bring the index down in the process? No analyst is obviously willing to put a date for that correction, but a closer look at the numbers tells its own story.

For some time now, more shares have been losing ground than gaining. A look at advance-decline ratios shows that while the main indices - the Sensex and Nifty - have been gaining since the turn of 2005, the broad market has been slipping (See table).

Says Deepak Jasani, head of retail research at HDFC Securities: “Larger money is chasing a smaller number of stocks, based on positive news flows. There hasn’t been much action in the mid- and small-cap segment in the latest rally, but they might see a resurgence before the fourth quarter results.” That means there may still be some pleasant surprises in April and May.

Though recent research reports from foreign brokerage houses have advocated caution while investing in India, foreign fund flows continue to be positive. But the torrent is weakening. “Though inflows have been strong, outflows have also increased,” says Paras Adenwala, chief investment officer - equity, at ING Vysya Mutual Fund. While the average net daily purchases of foreign institutional investors (FIIs) in February was Rs 398.54, the same in March has reduced to Rs 292.28. The FIIs have poured in Rs 15,761 crore in 2006 so far.

On the other hand, domestic money has begun chasing stocks. Many new fund offers of mutual funds have collected record amounts - with Reliance Equity raising more than Rs 5,700 crore - and this money ultimately has to find its way into the markets. It has. While mutual funds were net sellers by Rs 12.92 crore in February (daily average), they have been net buyers by Rs 170.67 crore in March. No wonder then that their net purchases of Rs 2,901 crore in March alone exceeded the figure for net purchases in the whole of 2006 by approximately Rs 1,500 crore.