The Sensex has gained almost 2000 points in a span of 5-6 trading days and is ripe for even more, purely on Modi mania.

The problem with the markets is that they are running not on expectations, but on colossal expectations from Narendra Modi. On Monday power stocks rallied anywhere between 5-15 per cent, on hopes that there would be power sector reforms. PSU Banking stocks also rose on Monday between 5-15 per cent on hopes of capital infusion for these banks. Cap goods and infra stocks have been rallying on the back of a big investment boost from the new government. Every sector is rallying on Modi hopes.

Take a look at some stock prices from the power sector that have rallied on Monday. Tata Power was up 10 per cent, NTPC was up 10 per cent, Bhel a power equipment major was up 11 per cent. PSU banking stocks have rallied more than 50 per cent in the last two months as "Modi fever" grips the markets.

Now, where the run will end is not certain. Such is the frenzy, that if you do not see the beginning of reforms in the next one month, you could see small reactions in equity markets.

In fact, so high are the expectations, one might want to a see a major announcement every other day.

But, the government may have other headaches to deal with. The first part of the many problems would be managing inflation and growth. It's a herculean effort to see growth rising, without a corresponding rise in inflation. Each time you provide an impetus to growth, inflation too shoots up. It would not be a surprise to see the same thing happening this time as well.

One thing that could work in favour of Narendra Modi is that the rupee is gaining strength, which could push fuel prices lower, since we would import crude oil at lower rates. Lower fuel prices, would mean at least to some extent push inflation lower - albeit marginally.

But, a gaining rupee could also hurt exports badly, which is another problem that the government needs to handle.

In any case equity markets have run up sharply on expectations. How far they run without the first signs of economic revival or without an uptick in the investment cycle is difficult to tell. Investors need to be a little cautious at this stage.

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