MUMBAI: With markets awash with liquidity, courtesy balance-­sheet expansion of central banks, India’s frontline Nifty 50 index swiftly soared past the psychological 10,000 mark. In just five trading days, it has notched up more than an 11% rise.

Globally also, equities have raced ahead with some of the top markets such as the US leading the rally. Some of that good cheer has rubbed off on India, especially now as the country begins a phased exit from an over two-month long lockdown and looks at kickstarting the economy.

The fact that foreign investors have turned buyers of equity of more than 10,134 crore in the past three days has only fuelled the rally. Also, interest rates have been falling, with the 10-year G-sec again below 6%.

Clearly, sentiment for risk assets has altered in recent times.

“It doesn’t take much time for sentiment to change in the markets. What one has to focus on is whether the economy is out of the woods. I feel the economic decline is the highest cyclically because of covid. So, the current market optimism is not understandable. The market often runs ahead of itself. I would not say the market is wrong. But it is sentiment now, which can be very good at times, and quite bad during other times,” says Raamdeo Agrawal, joint managing director, Motilal Oswal Group.

The surge in the market comes at a time when India is navigating its worst-ever economic downturn. Agrawal said he could not recall a time in recent past when the GDP series fell so much in a year, baring in the seventies. “We are going to see the biggest decline in GDP in a year. There is a very good likelihood that GDP could be flat or even lower, depending on how the rest of the year moves.”

Even so, global authorities have been deploying all the ammunition–huge amounts of liquidity–they can muster to stave off recession and worse, a depression. “Global regulators have been upfronting fiscal and monetary stimuli from day one from their experience of the global financial crisis. The Western economies don’t want to be seen wanting here,” notes Agrawal.

More importantly, the economic recovery will depend on many factors even mobility restrictions. With social distancing likely to be the new normal for a while at least, businesses will be hard pressed to operate at full capacity while operating costs in many sectors are likely to escalate. The return to pre-lockdown levels is a distant prospect.

“The economy has to do well for corporates to do well. Covid-19 has dealt a blow that is still unravelling. Market is very optimistic that some remedy will be found. But with social restrictions, the economy cannot get into the same momentum that it was during pre-covid. Growth will be very tough,” said Agrawal.

Of course, some sectors dealing with essentials are likely to bounce back sooner; that is heartening, but much of the discretionary space will take a little longer to clear up. “India is a country of essentials, and it is not a country of discretionary. We will recover about 70% of pre-covid demand. Essentials will come back more quickly, fuel demand will come back, and FMCG will also do well. Many parts of the economy will recover, but it will stay in the cautious lane,” said Agrawal.

That would mean that the earnings growth for FY21 would be negligible or very low in many sectors. The Nifty 50’s trailing price-to-earnings multiple has already jumped to 18 times, according to data from Bloomberg, from the lows of 13 times seen in early April. This warrants investors to err on the side of caution.

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