Greed over reason

The BSE Sensex and Nifty are scaling new highs every other day though the economic landscape is not that uplifting. The Sensex crossing the 32,000 mark may enthuse expert players, but for novices it is a danger signal. Middle-class Indians, it seems, are moving from the safety of bank deposits to risky mutual funds, which do not know what to do with excess money except throw it in stocks. Foreign institutional investors too, left with limited investment options, see India as a good bet.

There is a mix of good-bad economic news and each picks the one that suits their risk appetite. The hoi polloi need to resist greed and watch the dance of bulls from a safe distance. The bulls have their logic. They believe inflation dipping to 1.5 per cent in June may prompt the RBI to lower interest rates. Foreign capital outflows are unlikely as the US central banker has ruled out multiple rate hikes. A good monsoon will boost farm production and kick up demand for industrial and consumer goods. And finally mutual funds being flush with cash won't go on a stock-selling spree easily in the near future. But there is a second, contrarian, less optimistic narrative that says low inflation is a sign of trouble as it points to lack of demand. The collapse of farm prices is an indication of growing agrarian distress, resulting in farmer suicides and protests. The accumulating bad loans may cripple banks. Finally, the drying up of bank credit demand means no industrial project/expansion plan take-offs, and fewer job opportunities for youth. 

The second line of argument is closer to reality because interest rate cuts may not translate into an automatic pick-up in the corporate demand for bank credit. Projects do not start coming up overnight. Besides, state finances are set to worsen due to the pay commission reports and politics of loan waivers, limiting their capacity to boost industry or agriculture. Going by protests, it seems GST has hurt farmers, small traders and the textile and unorganised sectors, constituting a large segment of the population. Large companies will benefit and they are the ones driving up the Sensex.