Macro factors back sharp Sensex rise

BSE Sensex, India’s benchmark equity market index, crossed yet another psychological threshold of 80,000 on Wednesday. The Sensex has taken only 139 trading sessions to complete its journey from 70,000 to 80,000 points, the quickest ever 10,000-point addition to its value. What is one to make of this achievement? Three points need to be made to answer this question.

The first is a need for a sense of proportion. Each new 10,000 points mean a smaller growth of the value of the Sensex. For example, the journey from 10,000 to 20,000 meant a 100% growth while the one from 70,000 to 80,000 means just a 14.3% growth.

The second is a more substantive question. Is the Indian equity market being driven by exuberance? An international comparison of the PE multiples — it compares share prices with earnings per share — suggests that it is. But a historical comparison shows that the PE multiple of the Sensex is lower than what it has been in the near and distant past. Read together, they suggest that the ongoing bull run could be driven by India’s relative advantage vis-à-vis other global economies rather than unhealthy exuberance.

The third and most important is the question of the larger macroeconomy. Much of India’s relative advantage has come because of its macroeconomic stability. Fiscal restraint shown by the Centre since the pandemic has played a role here. While this has been music to the ears of investors, it has also contributed to the ongoing growth trajectory not being broad-based. This must change if private capex, and, therefore, profits, have to increase on a sustained basis. This is what will justify the forward premium driving the equity markets. Rejuvenating broad-based growth without hurting investor sentiment is the most important economic policy challenge at the moment.