Will the Sensex touch a new high?

The US Federal Reserve's decision on September 18 to continue with its quantitative easing (QE) instead of, as was widely expected, tapering it off by S10-15 billion a month, came as a delightful surprise for the Indian market. The market rallied immediately on Thursday, crossing the 20,000 mark, rising to an 34-month high of 20,739.69 points, before closing at 20,646.64.

The reason cited for postponing the tapering off was that the unemployment rate in the US still remained high. Until the unemployment rate drops below 6.5 per cent from its current 7.3 per cent (in August), the US Fed is not expected to hike interest rates.

Sentiment influences market behavior considerably. Till the day the US Fed meeting was held, the overall feeling about the Indian market was negative. But now things are different. Zero tapering off means easily available dollars will continue to flow into India.

If the new Reserve Bank of India governor Raghuram Rajan, scheduled to make his first policy announcement on Friday, even hints at a possible rate cut, the market has now acquired the momentum to rally even further, touching a new high.

The BSE Sensex is only 560 points away from its previous all-time high of 21,206.77, which it scaled on January 10, 2008.

Given the US Fed's decision, the RBI could take the risk of a rate cut to boost growth. But most market watchers feel Rajan will leave rates unchanged.

But tapering off cannot be wished away forever. It is bound to happen in the next few months.

With the tapering off threat receding, it is slow growth that is going to have a major impact on fund flows into India in the immediate future. Gross domestic product growth of 4.5 to 5 per cent is not good enough to attract capital. GDP growth must rise above 6.5 to 7 per cent.

Every year 12 million people join the Indian workforce and jobs have to be generated to accommodate them. This will happen only if there is capital flow into productive segments of the economy like manufacturing.

The government has taken some recent measures to show it means business, but the benefits will take time to manifest themselves.

Markets do not mirror the current state of economy. The Indian market may continue to rise further with the momentum it has gathered, despite no real change in the economy.

Overall, till the general elections in May-June 2014, volatility will grip the Indian market. Market moves will be more speculative, depending primarily on global and domestic events rather than fundamentals.