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5 Nov, 2013

A Sensex gone awry – The Hindu

This reflects a larger feature of the equity market in India. It is thin or shallow in at least two senses. First, only stocks of a few companies are actively traded in the market. Thus, although there are more than 5,000 companies listed on the stock exchange, the BSE Sensex incorporates just 30 companies. Second, in the case of a significant number of these stocks there is only a small proportion that is available for trading, with the rest being held by promoters, financial institutions and others interested in corporate control or influence. The net result is that any large inflow of liquidity into the market results in a spike in prices, especially if purchases are limited to a few stocks as happened recently.

This makes the recent rally even more puzzling. While excess liquidity, especially in the U.S., imparts a supply-side push to investments, there is no obvious reason why those investors should choose a country that is performing poorly, and take the risk of investing in a few stocks that are already very highly valued. Especially given the political uncertainty that a general election due in a few months generates.

Speculation provides an explanation.

Read the rest: A Sensex gone awry – The Hindu.