Sensex climbs more than 1,000 points in 3 days. Will the rally hold?

The markets are cheering RBI Governor Raghuram Rajan's measures, with the BSE Sensex gaining over 1,000 points to touch 19,270 in the last three days. Should you, as an investor, join the euphoria, or wait and watch?

Don't mistake this short-term rally as a sign of recovery. On the contrary, a US strike in Syria could see a flight of capital to safer markets and see Indian stock prices fall sharply. There have been reports that the US has asked some its embassies in West Asia to evacuate staff and this may not be taken well by the markets when they open on Tuesday (The markets are closed on Monday on account of Ganesh Chaturthi).

The uncertainty regarding deficits in India, rising inflation, high crude oil prices, and a crucial US Fed meeting to decide on tapering of an easy money policy called 'quantitative easing' will continue to put strain on the Indian market.

In fact, even before Rajan took charge as the new governor of RBI the market had started to bounce back.

The BSE Sensex turned from a low of 17,449 on August 28, has gained 10 per cent or 1,821 points to close on Friday at 19,270. But prior to this rise, the BSE Sensex has witnessed a sharp fall of 14 per cent on poor domestic fundamentals like weak rupee, rising oil prices and poor GDP growth in just one month. From a high of 20,351 on July 23, the Sensex fell by 2,902 points to 17,968 on August 27.

To be sure, the inaugural speech of the new governor has certainly impressed market participants. They hope that he will take positive steps to stabilize the Indian rupee, and help bring growth on track. A clearer picture may emerge on September 20 when Rajan presents his first monetary policy.

The rise in the market is also on the expectation that the government will increase diesel prices by Rs 2-3 per litre in the next few days.

Says Gautam Chhaochharia, Executive Director, Head of India Research at UBS, "India is a reasonable story, but one can't get carried away. It is not a runaway market. Today, the mood has changed. Majority of clients are holding back their investment." Adds Vibhav Kapoor, Group Chief Investment Officer at IL&FS, "Until we see a clarity we would prefer to sit on the fence as today the risk of losing is much more than gaining in the market."

The pessimism in the market may be a good time to pick up stocks but in the immediate short-term it would be better to wait for the outcome of the US Fed meeting on September 18 and the RBI policy on September 20.

For those who need much more clarity on the markets, there is no harm in waiting till the general elections are over in 2014. We will know if there is a chance of a strong coalition government taking charge of the battered economy.