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While the last trading session of the foregoing week did not produce much of a gain for the major indices since speculators decided to lighten up their positions, the beginning of the current week promises to be quite positive for the bulls. The Asian market cues are bullish on this Monday morning.

There was bit of a disconnect with the other Asian markets last week following the belt tightening measures by our central bank, the RBI, and as a result we joined Vietnam among Asian markets that showed net sales figures for the foreign institutional investors. However, this disconnect may not hold for long if the global liquidity scenario does not change much. It would be difficult for just one central bank of a developing country to continue tightening while others stay on course with the easy money regime. A case in point is Brazil where selic rates went as high as 19.5% in 2005 but it had to be brought down and the Bovespa, the Brazilian stock index, went to post new highs after that.

As of now, Chinese Shanghai Composite and the Peru stock indexes show bubble like formation but it is difficult to guess when they would get pricked. This bull run the world over is primarily driven by an enormous glut in LIQUIDITY. One is reminded that around mid-March this year the Australian money supply is 13% higher from a year ago, Brazil's M3 is up 18%, Canada's M3 is up 10.5%, China's M2 is up 17.8%, England's M3 is up 13%, the Euro Zone's M3 is up 9.8%, India's M3 is up nearly 22%, Korea's M3 is up 11%, Russia's M2 is up 49% and the US M3 is up 11%. In the midst of such an enormous "global liquidity glut" trying to keep markets down, for any extended period of time, is like pushing down a helium balloon under water. With most of the major central banks have been "asset targeting" until the inflation monster rears its head in truly an ugly manner this might continue for some more time.

Such is the power of liquidity to prop up asset markets. It would be delusional to think that asset markets all over the world are going up on their fundamentals. Some people are loathe to consider the macro factors and consider only company specific fundamentals, for them the macro factors don't matter. However, when you see stock markets all over are going up, and most of the indices are behaving in the same manner having begun their run from early 2003 then the market movements can't possibly be based only on company specific fundamentals; there is surely something more to it. This is goldilocks scenario in progress where it will end only the central banks would know.

Our RBI's belt tightening is on the back of inflation reaching politically intolerable limits but there is another problem lurking and that might lead to a change in stance from the RBI: the development in the Housing market. The EMIs are fast becoming an unmanageable propositions for borrowers. Indian retail borrowers are for the first time testing the other side of the coin in floating rate loans. This would soon become a political issue and our central bank like its counterparts in the UK and the US would have to come in with some easing measure so that the Housing loan market development does not snowball into a political fireball.

Again, pushing interest rates further up and tightening liquidity more might result in banks recording more NPAs arising out of Housing loans among other things. No central bank in the world would like to see housing and realty sector loans turning into NPAs on a large scale since banks would not be able to free their locked-in capital from this sector even if foreclosures are attempted owing to subsequent fall in asset prices in the sector. This, in turn, leads to banks getting hamstrung in extending loans to other sectors when they need it. It may turn out to be a difficult problem.

Indian bull run since early 2003 is also on the back of a hitherto unforeseen credit growth clocking an annual growth rate of around 30% during this period, this is--for all practical purposes--an offshoot of the glut in liquidity; if this credit growth cools off consumption is sure to get affected and the corporate top-lines would also be impacted with its consequences. To think otherwise that Indian consumption story is primarily black economy driven and not by huge growth in credit is to delude oneself. The proverbial Indian black economy was there earlier as well but it did not lead to so much of consumption.

Coming back to our liquidity scenario, we can see large swings in the market but until the global liquidity glut cools off the asset prices would continue moving up amidst a lot of volatility till central banks all over the world decide that this goldilocks scenario can't continue any further. Today, trading stock market indexes and currencies has turned broadly into a game of central bank watching.

Talking about technical levels, if the Sensex crosses 12990 then it can again try to test the zone between 13250 and 13390. Real strength would be signaled if the Sensex crosses 13650. On the downside, any fall below 12316 would pose major problems for the bulls. The situation appears to be pretty much fluid.

Rajat K Bose