The buying frenzy sweeping Indian stocks is showing signs of irrational exuberance, swelling the risk of a meltdown if the assumptions behind the pulsating rally fall short of heightened expectations. With the annual budget due in less than two weeks, the moment of reckoning may just be round the corner.

The top-30 Sensex topped 35,000 for the first time ever on Wednesday, and shot up by more than 500 points by Friday, underscoring an overheating market. The benchmark, which is widely tracked by fund managers, climbed as high as 35,542.17 before closing at 35,511.58 — up 4.3 per cent this month after rising 28 per cent in 2017.

The broader 50-share Nifty also hit a record 10,906.85 before closing at 10,894.70, gaining 3.5 per cent this month. Both the indices have posted weekly gains for a seventh successive week in the longest winning streak in almost eight years.

“This is a dream run,” said Biju Dominic, who advises super-rich clients in Mumbai. “(Corporate) results so far have been good, and they are going to get better. If you have spare cash put that into equities or equity funds for higher returns.”

Cash flows seem to back his view with domestic equity funds continuing to receive a large share of household savings. Assets under management of mutual funds more than doubled to Rs21.4 trillion by end-December 2017, from Rs10 trillion in May 2014 when Prime Minister Narendra Modi won a landslide in national elections and fired up stock markets.

The immediate trigger for the stocks rally was the finance ministry’s decision to slash its additional market borrowing programme by 60 per cent to Rs200 billion, from Rs500 billion announced in December, citing “trends of revenue receipts and expenditure pattern”. The government had overshot the full-year budget for borrowings in the first eight months, set back by the troubled launch of a new national sales tax, and was cash-strapped.

However, record receipts from asset sales — cash raised from initial public offerings and follow-on share sales by state-run companies are on track to top a record Rs900 billion, double the Rs460 billion garnered in the previous year — and a pickup in economic activity have propped up revenues while some expenditures have been trimmed.

Still, it would be foolhardy to believe government finances are in good shape. The budget, to be unveiled in parliament on February 1, for the next financial year that starts in April is widely tipped to have a liberal dose of populism because of the political leadership’s compulsion to woo voters ahead of many local elections in the coming months.

Caution warranted

“The big elephant in the room is the budget,” said a foreign fund manager, who did not want to be named. “It’ll be the decisive factor to prove this is not a stocks bubble.”

He said the government, which faces national elections in just over a year, would be under pressure to focus on creating jobs, particularly at the bottom of the pyramid and for new graduates pouring out of colleges. Greater policy initiatives for the rural sector, especially for farmers and related activity, are also on the anvil besides heavy investment in infrastructure.

“The problem is money,” he said. “Public finances are under severe strain but hiking taxes will be a tough call.”

There is talk the government may re-impose long-term capital gains tax on shares or tax dividend income in the hands of stakeholders. If any of these happen there could be a backlash on the markets and can jeopardise fund raising plans for both the private and the public sectors.

“There are too many people jumping into the bandwagon because no one wants to miss out on a big rally, but it is also essential to ring-fence against a collapse,” said the foreign fund manager. “I would rather wait until the budget and anyway the market is due for a correction.”

Upbeat earnings

Buoyant quarterly results from companies have underpinned the stocks rally and there is optimism the earnings could show further rise in the coming months.

Energy conglomerate Reliance Industries Ltd, the country’s most valuable company, reported a 25 per cent jump in October-December consolidated earnings of Rs94.23 billion, bolstered by strong refining margins in its core business and a first profit from its newest activity — telecom services.

“This is just the beginning,” Chief Financial Officer V. Srikanth told a news conference. “Earnings are going to be way bigger.”

The company operates the world’s largest oil refining complex in Jamnagar in Gujarat and its gross refining margin in the quarter was $11.6 per barrel, more than double the benchmark Singapore margin of $4.4. Commissioning of a petcoke gasifier by March is expected to slash external gas purchases for the refinery and boost refining margin by as much as $2 a barrel.

Earlier this month it had completed a plant to convert waste gas from the refinery into petrochemical products.

“This quarter marks the culmination of our petrochemical expansion projects and the first positive net profit contribution from our newest business line — digital services,” Chairman and Managing Director Mukesh Ambani, India’s richest man, said.

“We are excited about the prospects of both our energy and consumer businesses due to strong growth in Indian markets and constructive macro environment.”

Since the launch of its mobile telecom services, Reliance Jio Infocomm Ltd, has notched 160.1 million subscribers, shaking up the cellular market in India with cut-throat tariffs. The unit posted a profit of Rs5.04 billion for the December quarter.

Shares in Reliance, with a market value of nearly Rs5.9 trillion, closed at Rs929.35 on Friday ahead of the results, down 1.8 per cent over the week.

HDFC Bank and Kotak Mahindra Bank, two leading private-sector lenders, posted a 20 per cent rise in quarterly earnings on strong loans growth and a firm handle on bad loans. ITC, the country’s top cigarette maker with interests in a host of activity such as hotels, consumer products, food items and paper pulp, reported a better-than-expected 16.8 per cent rise in profits.

Software services companies, which have underperformed the Sensex over the last three years, could see a turnaround on the back of improving global spending on technology, Morgan Stanley said.

It upgraded Infosys, Tech Mahindra, HCL Technologies and Mphasis to “overweight”, Tata Consultancy Services to “equal weight” and the industry as a whole to “attractive”.

Major results in the coming week are Asian Paints, Axis Bank, Havells India and JustDial on Monday, InterGlobe Aviation, Idea Cellular, Biocon and Canara Bank on Wednesday and Maruti Suzuki on Thursday.

Markets are closed on Friday for India’s Republic Day.

The writer is a journalist based in India/