Will the good times last?
The answer lies in the analysis of market drivers - fundamentals, sentiment and liquidity.
Corporate performance is crucial, as the recent rally has been driven by expectations of robust earnings growth. A higher tax outgo - meaning better corporate earnings - signals optimism as regards company fundamentals for Q3FY07. India having emerged as the preferred destination for foreign investors, thanks to its high growth rate, good FII allocations are expected for India in the new CY07, as global liquidity remains high.
The sentiment remains upbeat as India remains a consumption and infrastructure-led story. Though there are miles to go on the Infrastructure front.
Hence, even an interest rate rise may not have an adverse impact on the overall economy as in the past. While further upside is not ruled out in the coming months, we advise caution.