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Starting 1st April, there are a total of eight sessions to the beginning of the elections. Three sessions have been super duper, with Nifty and Sensex new highs. The 40,000-Index does not seem so out-of-reach now. And those on the Street say that there is some frenzy left before India goes to polls.

The current rally is being led by two things – the strong sense that the BJP will return to power and we will have stability on the political front and this is exactly what the FIIs also think , which is why we see more money being pumped into the markets by the FIIs. Thus BJP retaining power and FIIs pouring money – these are the only two reasons why we are seeing these new highs being hit every day.

FIIs, in last two sessions of this month bought shares worth Rs.20,678 crore and sold to the tune of Rs.11,127 crore; they remain net buyers worth Rs.9,552 crore. In March, FIIs were net buyers to the tune of Rs.33,116 crore. In fact they have turned net buyers since Feb.

What has also helped the sentiments tremendously is the change in stance by two bigwig FIIs – Goldman Sachs and BNP Paribas. Both are extremely positive and feel that earnings in India Inc have bottomed out and we could see double-digit growth in current fiscal of FY20. They also opine that the private capex cycle which has been on the ebb will pick up once the election results are out.

BNP Paribas upgraded India to ‘overweight’ from ‘neutral’ on April 1 and also raised its December-end target for Sensex to 42,000 from 40,000 earlier. And it has included stocks like – IndusInd Bank, Axis Bank, HCL Tech, Eicher Motors, Maruti, Titan, ITC, Kotak Bank, HDFC Bank and Reliance Industries as its top bets. It has excluded Infosys, M&M and Tech Mahindra.

Goldman Sachs put out a report stating that ‘Value’ and ‘Cyclical’ stocks in the market will do much better as investors will go from safe haven stocks to quality stocks as they now see political stability. Their list of stocks – SBI, ICICI Bank, L&T, Ashok Leyland, JSW Steel, M&M, Adani Ports.

And there is also the expectation of a rate cut tomorrow. Not just in India but the overall perception is that central banks across the world might resort to cutting rates, which in turn will lead to more money coming into the emerging markets. And in the emerging markets, if India gets a stable Govt once again, naturally, it will become the hotspot.

Having said all this, for small retail investors like us, better to be cautious  as the current rally in based purely on the election outcome and no other fundamentals have been considered. We are banking on private capex picking up after elections but the hard truth today is that capex is at a 14-year low. A CMIE report shows that the total value of new projects for Q4FY19 stood at Rs 1.99 trillion, a fall of over 54%. So to think that come 23rd May and next day onwards, there will be a surge in capex; that’s not going to happen. At least the first six months of FY20, capex will remain low.

The Reserve Bank of India’s Order Books, Inventories and Capacity Utilisation Survey (OBICUS) for the July-September quarter of 2018-19 was also telling – one fourth of total existing capacities with companies are lying unutilized. When existing capacity itself is not being utilized, why will they add new?

At the moment, what the market feels – exuberance and what people feel on the ground – somber; there is a very strong line of disconnect. Auto companies, month-after-month are reporting subdued sales and consumer durables too are showing signs of stress. Despite deep discounts, demand remains low. March month manufacturing PMI has come in low.

Over and above all, the market seems to have ignored one grave truth facing Indian farmers – the real-time drought-monitoring platform, Drought Early Warning System has said that about 42% of India’s land area is facing drought, with 6% exceptionally dry--four times the spatial extent of drought last year. Andhra Pradesh, Bihar, Gujarat, Jharkhand, Karnataka, Maharashtra, parts of the North-East, Rajasthan, Tamil Nadu and Telangana are the worst hit. These states are home to 500 million people, almost 40% of the country’s population. Monsoon is till 2-3 months away and for these states, more than election outcome, rains is all that will matter. And elections will actually delay Govt acknowledgement of this situation and taking remedial action. Thus rural distress is bound to impact private consumption.

So while this exuberance on Dalal Street takes indices to new highs, lets not lose sight of truths on the ground. Celebrating political stability is one thing but tackling major macro economic issues is quite another.

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