India's benchmark stock indices rose for the seventh week on the trot, fuelled by large fund inflows from foreign institutional investors (FIIs). The Sensex has now risen more than 3000 points from its December low, without any meaningful correction and is up more than 20% in seven weeks.
It may sound cliché, but the fact remains that mammoth amount of foreign flows have sparked the rally. Indian fundamentals have not improved dramatically, though there have been favourable indicators that have led to the momentum.
Among the positives have been inflation figures, which are beginning to taper off, giving rise to hopes of a decline in interest rates and hence better economic growth prospects.
Going forward it is likely that there maybe profit booking which is likely to see a reaction in stock prices. Also, analysts are of the opinion that the seven week rally has led to sock prices moving from an undervalued zone to an overvalued one.
Marketmen expect Sensex companies to report an EPS of around Rs 1250 for 2012-2013 and hence the price to earnings ratio at current levels translates to around 15 times for Sensex companies, which is a fair value considering long term averages.
Therefore any sharp rise from these levels may see valuations stretching, and markets overheating. Hence, any further rally next week may be a good time to book profits.
Also, there are still headwinds like the Greece crisis, a problem that is now becoming more perpetual. Investors might also like to wait and watch for the union budget and the RBI credit policy events, slated for next month, which are likely to be key triggers for the market going forward.