The Indian Economy Blog

February 6, 2006

Sensex at 10,000

Filed under: Capital markets — Reuben Abraham @ 11:47 pm

On Monday, the benchmark Sensex index of the Bombay Stock Exchange breached the 10,000 mark for the first time since its launch in 1986. Time to say Irrational Exuberance?

I am sure a lot of you have an opinion on this, especially those of you who work in the capital markets. Comments are open.


  1. Expansion of the banking sector creates tulips.

    Comment by epoch — February 7, 2006 @ 3:25 am

  2. So long as it didn’t cross the 10k point in Jan. I would have lost a lot of moolers :)

    Comment by Patel — February 7, 2006 @ 4:57 am

  3. Mr. Abraham,

    I’ve been seeking market opportunities around the world, based on what I see as secular bull markets in particular asset classes. I’ve watched with amazement as the Sensex has powered up 50%+ over the past 12 months or so. Part of my interest in the Indian equity market is based on its domestic consumer demand, which I don’t see in many countries, outside of the U.S., U.K., and Australia, and part of my interest is based on watching petrodollar flows.

    However I have the following concerns about the sustainability of the Sensex’s current rally:
    1) money supply growth is peaking;
    2) an average P/E of around 16 makes the Sensex no longer inexpensive, particularly in view of average dividend yields; and
    3) a central government debt/revenue ratio of a worrisome 435%.

    I’d certainly be interested in your and your readers’ perspectives on these concerns.

    With best regards.

    Comment by Suresh — February 7, 2006 @ 5:24 am

  4. At a p/e ratio of 16-18 means, returns turn out roughly 5-6% which is very well safe market rate. Risk reward ratio is out of favor. As it turns out, when a nation is clocking 7-8% growth, I neither see a steep downside. Going ahead sensex is more poised to rise, though short term blues dabble once in a while.

    Comment by Harsha — February 7, 2006 @ 7:57 am

  5. Yes – sensex going into 5 digits, and remaining there, without any rumours about scams, is a time to muse.

    1) I have been seeing that Life Insurance Corporation is bigger than State Bank of India, and there does not seem to be anything in the near term which would change the relative size

    2) Individually these two, SBI & LIC, are more than double the size of all the Mutual Funds put together (Indian Mutual fund industry is only about 50 bn USD in size)

    Or both these tell them that the Indian retail investor is not yet participating in the capital markets in any material way – large IPO’s, trouble-free stock-exchange settlements for over 10 years, Demat Accounts, Open Ended mutual funds with over 500 schemes, quarterly disclosures, not withstanding

    What will it take to get the Indian individual who has a lot of surplus assets (Indian demand for gold is unabated despite 25 yr highs, bank deposits are growing by more than 16%, real estate everywhere is becoming more expensive, the current account on travel has become deficit – not because of slowing inbound tourists, but large growth in Indian outbound travel, and ofcourse the ubiquitous effect of the increasing retail-loan portfolio of the banks).

    Despite the huge run-up even now when listed stock-broking companies talk about their customer base, they are use a figure in the range of 80-100K. Not at all representative of the 200 mn Indian middle class, nor of the hundreds of millions of dollars which these companies have raised in the last few years to tap these customers

    Are Indians so capital market risk averse , that they dont mind tolerating electing the kind of people we do as leaders of the country/ state/ municipality, and that too for so many years; but they cannot take the chance of investing in the indian stocks !!!!

    Comment by venkat — February 7, 2006 @ 1:36 pm

  6. Venkat noted persistent consumer demand for gold. Whether knowing or otherwise, such demand is sensible given that there is a global secular bull market in commodities, and gold is participating therein. There are several ways to look at current valuations of gold. One is to compare it to inflation-adjusted fiat currencies. I’ve done so relative to the U.S. dollar at But, I think the more telling approach is to compare gold valuations to other assets. I’ve looked at gold relative to the Dow Jones Industrial Average and gold relative to oil here: Given gold’s undervaluation in inflation-adjusted dollar terms, Dow terms, and oil price terms, I think Indian demand for gold is justified. As fiat currencies continue to depreciate, Indian consumers will gain in purchasing power . . . and isn’t that the whole point of investing?

    Comment by Suresh — February 7, 2006 @ 11:03 pm

  7. Venkat, I doubt Indians are so risk averse. I think it has more do with their education of markets and, more importantly, education of the investment professionals. Not to generalize, but investment advisors and folks who interact with individual investors not only speak technical jargon (in English – you shrunk the market by about 50-60%, or more, right there) but also look down on people when they interact. I read with horror some answers to questions with regards investment issues in popular dailies. I would think without proper public relations training of investment advisors and other professionals, it would a long time before potential Indian investors can get comfortable to join the market en mass.

    Comment by Chandra — February 8, 2006 @ 3:32 am

  8. Suresh,

    To me the Indian demand for gold seems to be driven by tradition/ culture rather than investment orientation. Essentially the women/ their family are using it as something which they can carry around and liquidate/pawn in times of need. This maybe more a reflection of the inadequate access to personal finance (even today I routinely hear people borrowing at interest rates of 5-10% per month, and reasonably large sums at that: INR 50,000 to 5,00,000). Given the fact that only 8% of the workforce is in the organised sector, means 92% is outside the ambit of monthly salaries – credit cards – retail loan strategies of the banking system !

    The Indian economy/ financial system has some way to go before it can serve the needs of the people in the informal sector

    Comment by venkat — February 8, 2006 @ 12:46 pm

  9. Venkat,

    You won’t get any argument from me as to gold’s use as a bank-deposit alternative in many parts of India. I’ve heard several stories from my parents’ generation that private banks folded, and savings therein vanished. Further, I’m told that bank deposits now need not be insured by the Deposit Insurance & Credit Guarantee Scheme of India. So, the wariness of the common man (Rajan Six-Pack, as opposed to America’s Joe Six-Pack) toward banks is understandable.

    You also won’t get any argument from me that gold is a terrible buy-and-hold investment vehicle. Gold’s price chart from 1980 through 1999 could tell you that. How many people can wait out a 19 year bear market?

    My only point is that the current investment/savings vehicle of Rajan Six-Pack is not biting him. Rather, it is gaining in value relative to many major currencies. At least with respect to the U.S. dollar, gold has gone up about 33% in one year. Aside from Sensex index and Kospi index investors, who would complain about such an annual return?

    Comment by Suresh — February 8, 2006 @ 7:04 pm

  10. How about some interest rate and inflation statistics while we’re at it.

    16 does seem like irrational exuberance to me, perhaps justified by the growth rate if inflation is in check (is it?).

    At a p/e ratio of 16-18 means, returns turn out roughly 5-6% which is very well safe market rate.

    Is that wrong or is that wrong… such a relation is ludacris to make.

    Comment by D — February 9, 2006 @ 10:45 am

  11. Along the lines of D’s inquiry, to help put the Sensex overvaluation/undervaluation in context, can anyone point me to a chart of historical dividend yields for the Sensex?

    Tigers in your tank ( lists various Asian countries and their average P/Es and average dividend yields. The article lists India (presumably the Sensex index) as having an average dividend yield of 1.3%. How does this current dividend yield compare with the Sensex’s historical average? Is the average Sensex dividend yield nearing an all-time low? Near an all-time high?

    Also, is there a tax rate difference for dividends and capital gains in India? That is, if capital gains are taxed more favorably than dividends, perhaps companies are retaining more earnings and hoping that such retained earnings are reflected in their stock prices.

    Comment by Suresh — February 9, 2006 @ 8:29 pm

  12. “Reserve Bank of India today raised a key short-term interest rate by 25 basis points to 5.50 pct, the third such hike this fiscal year aimed at keeping inflation in check.”

    “The Reserve Bank of India started raising rates after inflation surged to nearly 9 percent in August 2004. Inflation has since fallen to the 4.5-5.0 percent zone.”

    Comment by Suresh — February 10, 2006 @ 12:47 am

  13. At a p/e ratio of 16-18 means, returns turn out roughly 5-6% which is very well safe market rate.

    I forgot proper punctuation, All I mean to say that we get 5-6% safe returns through bank FDs or debt instruments. And at this p/e ratio, earnings of a wide market remains 100/16, approximately 6%, Is there any need to take risk for msuch a narrower margin of gain?

    Comment by Harsha — February 10, 2006 @ 7:19 am

  14. Is there a “RATIONAL EXEBERANCE” to the capital markets. If yes, please mention ONE…atleast ONE

    Comment by Giri Guevara — February 10, 2006 @ 1:09 pm

  15. The Sensex has remained over 10,000 now for three days, and infact is the first week that it has closed above this level. The FII flows and Mutual Fund flows have been strong in 2006 (maybe both are of equal magnitude, atleast in the short 6 weeks that have gone by)

    However there are some interesting signals being given by the dividend policies of Mutual Funds. There are many funds which have not declared dividends, especially the equity ones, for more than 12 months, even though their performance has been good(absolute and with respect to their benchmarks and peers). Does this mean the Fund Managers want to retain the cash, atleast for now ?

    Yes the dividend yield of the Sensex/ Nifty, would be low, as in the Index you have many IT companies, who are richly valued (25+ PE) and are not great in dividend payouts. In addition the Finance sector, generally a good dividend payout sector, hasnot been in the indices in a big way till recentl

    Comment by venkat — February 11, 2006 @ 2:56 pm

  16. Yes, the 3,000 and 10,000 levels of Nifty and Sensex seem to have survived a weekly closing and also the day after. The reports of billions of USD to emerging market allocations, and already close to 2 bn USD flowing to India in the first 6 weeks could be the only possible reason. Yes with the current PE at around 18, the safety factor is low, unless the prospects of 18-20% growth in earnings in the medium term is a near certainity. Given the politics and infrastructure constraints I am not so sure, but well the markets seem to think otherwise. This has also been supported by the local mutual funds having collected close to USD 2 bn in fresh money in 2006, from the domestic investors. Liquidity is surely a high. Wave theorists have now started airing their views about the timeframe (3 to 5 years only) for reaching 20,000 and 6,000 respectively.

    Is this all for real !!!

    The sensex dividend yield has seen a high of around 3%, in bearish markets, but generally it trades around 2.2%.

    The capital gains has been made 0% (nil) for a holding period of more than one year and trades thru the stock exchange. For short term it has been made 10%. This has been the status since 2004.

    Dividends are tax-free, in the hands of the recipient, as they are declared out of tax-paid profits of the companies. This has been the status for a while

    Comment by venkat — February 13, 2006 @ 3:31 pm

  17. Sensex @ 11000 +

    Well it’s not just the sensex one can say it’s a sex to the market which is driving it on a record index high every day.

    One could say those were the old days when it took years for market to move 500 points in months. But today it’s a dream market moving with a record high and creating a new history.

    It’s understood that as Indian business achieving success in their progress, which gives a lift to the market along with the demand and supply of stocks.

    But what drives the market at such a high speed is still a big time mystery.
    Upward movement of 3k to 4k points in a time span of 6 months is something which even top analysts failed to explain.

    Even the Predictions fail in this market. No matter how big the analyst a person in studying this market from decades. Market has also proved them wrong.

    Besides buy and sale of stocks which moves the demand and supply in the market has also been amazing.

    An automated musical chair of demand and supply of shares of each sector in equal time band has protected the market from falling down.

    One can say those were the old days when our markets were running on FII. But now it’s the in-house people who are driving this market with a share of investment less then 2% in shares and stocks.

    And this upward growth is attracting more and more investors from local and overseas. It’s a very good sign that we are able to attract world towards us.

    Well it would be not wrong if one say IT HAPPENS ONLY IN INDIA.

    Comment by Rajiv Bhatt — March 25, 2006 @ 7:31 am

  18. It may sound absurd at this point in time; but it was predicted that the sensex will tank once RPL shares were listed. It was also predicted that the sensex will see a level below 10K before June 2006 as the un-published interest rate on market borrowings against stock exceeded an abnormal 2% per month. The growing clout of the satodias or bear punters was visible through out April and May 2006 though their grip tightened in May 2006. If anyone cared to analyse the MAy 2006 F&O position, one would have got the whiff of the impending hammering! In all these mayhem, the fundamentals remained as strong or weak as ever!! So much for the BULL talk from all the Business Channels that would have been better off airing fashion shows!!!

    Comment by Suresh — June 6, 2006 @ 9:42 pm

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