MOST investors are baffled at the continued rally in the markets as concerns relating to the economy do not seem to be receding. So, the question that is uppermost in the minds of everyone is, why are the markets rallying, especially when the economy is floundering? The explanation put forth by some for this continued rally is that the downturn in the economy appears to be bottoming out, there is the Chidambaram effect that comes with high expectations of reforms and the expected release of liquidity by the European central banks, which are better known as QE3 (quantitative easing round 3). However, these explanations may not hold much water, if one looks at the fiscal mess that the economy is in, the current political scenario, and the failure of QE1 and QE2 to herald a bull run.
The only reason that appears to justify the current rally is the liquidity brought in by FIIs, for they see India as being amongst the few oases of growth, one which promises vibrancy in a scenario where other countries appear to have given up the growth path. What appears to be driving FIIs is the theory of relativity. They see more things bad in their own economies compared to India. Also, the Indian market offers the most diversified basket of stocks across sectors and corporates…..READMORE