What's driving the Sensex to such dizzy heights?

Updated: Friday, November 1, 2013, 10:15 [IST]

Economic fundamentals in India continue to remain weak with growth at a decade low, consumer inflation near double digits and manufacturing activity barely recording positive growth. Political uncertainty and the prospects of a hung parliament still loom in 2014 and interest rates remain elevated.

Despite this, the Sensex closed at a new record closing of 21,033 points on Wednesday, breaching a record of 21,004 points set in Nov 10, 2010.

The Sensex and the Nifty are rallying despite weak fundamentals and the reason is just one - FII Liquidity.

FIIs or foreign funds have been net buying in the past several trading sessions thanks to ample liquidity globally. US, European and the Japanese central banks are printing money like nobody's business and this money finds its way into stock markets like India. In the US, the Federal Reserve is buying bonds worth $85 billion each month to push growth and lower unemployment in the country. This money finds its way into markets like India.

In a real life situation, what happens when you have plenty of money? You start spending on new houses, cars and even maybe a yacht, chasing everything you can possess.

This is exactly what is happening around the globe. Low interest rates and abundance of liquidity is pushing stock prices higher. It's also important to remember that it is not only the Indian stock markets that are rallying, but global markets as well.

In fact, the US S&P 500 keeps hitting new records and so is it for the German DAX. It's not as if global and Indian economic fundamentals have improved overnight. In fact, India's economic fundamentals have gotten worse. The only silver lining has been some stability in the rupee over the last few weeks.

How far liquidity will drive stock prices in India is difficult to say. For small investors entering at these levels would be foolhardy. Especially, one should strictly avoid companies with weak fundamentals. Afterall, it's not as if the markets are rallying. In fact, there is no broadbased rally and only a select few stocks are driving the Nifty and the Sensex.

As the central banks around the globe keep printing money, it will keep driving stock prices higher. How long it will go on, is difficult to say.

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