A MILESTONE FOR INDIAN STOCKS
With the Sensex exchange having finally hit the 10,000 mark, champagne corks are flying. But could this be its peak for the year?

Everyone had been waiting for the Bombay Stock Exchange's benchmark 30-stock index, the Sensex, to cross the 10,000 mark. Last week, when the Sensex hovered around 9920, the exchange, in anticipation, hired a group of local drummers, called nagarawalas, to stand outside its wide marble steps and beat up a storm the moment the index hit 10,000. But the week came and went, and on the evening of Friday, Jan. 3, the drummers were sent home.

Too bad the exchange officials didn't have just a bit more patience -- those drummers would have come in handy on Feb. 6. Just 20 minutes before the closing bell, the Sensex zoomed past the 10,000 mark, hitting 10,002.83, before easing off to 9,980.42, a rise of 2.44% for the day. The long-awaited event sparked celebrations all over India's financial community. Brokers bubbled over with excitement, while TV business-show anchors finally donned their at-the-ready T-shirts and headbands with "10,000!" written across them.

Among the companies generating the excitement are construction-equipment maker Larsen & Toubro, cellular operator Bharti, and financier ICICI Bank (IBN). The underlying story has plenty going for it as well: the 8% to 10% potential growth rates India could see in 2006 and beyond, as well as the rush of not only foreign investment but also local retail investment into the local market. Market bulls like Rakesh Jhunjhunwala, a famous Indian investor who had predicted the high last week, were vindicated.

TAD OF PESSIMISM.  No doubt, the India story is hot. Excessive global liquidity, thanks to low interest rates in the U.S., high profits from oil companies, and a healthy appetite for risk among foreign and local investors has only served to intensify India's appeal. The country's companies have been delivering excellent profits, helping the Indian stock market rise 60% since last year, as both global and local investors bid up share prices.

With such a rush for Indian investments, even mid-cap stocks are considered hot buys. The land has seen $3.5 billion in foreign institutional investment just since last September. And retail investors put more than $1.5 billion into three new mutual funds in January alone.

Yet some warn that the Indian stock market, while still hot, hasn't gotten off to as sizzling a start this year as some other markets. Ridham Desai, head of research for Morgan Stanley in India, points out that year-to-date, the Beirut market has risen 47% and Brazil's has increased 25%, while India is up just 4%. In January, India underperformed emerging markets in Eastern Europe and Latin America in general, though it's doing better than much of Asia.

THINKING TWICE?  Desai points out that Indian valuations are rich. The Indian stock market trades at 4.8 times book value, compared to the global average of 3 times book value. "India is heavily dependent on foreign exchange flows, and if they slow down, India will run the risk of lower growth," warns Desai. With the market at about 10,000 now, he thinks it may have already hit its peak for the year.

What would cause foreign exchange inflows to suddenly slow? Investors might grow concerned anew over the old story of India not containing its fiscal deficit. Its current account deficit stands at 4.2% of GDP.

At the same time, if corporate profits in India retreat from their current robust growth rates, that might also give investors reason to think twice. Just two years ago, fresh and lean from long years of restructuring, they were showing great results and profit growth rates of 50%. Now, margins have narrowed as costs rise and companies spend heavily on capital expenditures. Corporate earnings growth, while still good, should slow to around 15% this year.

"A PRICE FOR EVERYTHING."
One big question: Can huge capital-spending programs kick in quickly enough to meet soaring demand? Manish Chokhani, director at Enam Securities in Bombay, reckons Corporate India will lay out about $200 billion in capital expansion over the next three years. "It's not a downtrend, but with earnings under pressure, growth will slow for now."

Yet that's hardly reason for too much concern. In fact, eager foreign investors are looking for a correction so they can invest more in India, a market they see with a long-term view. "The market will look higher three years from now, but three months from now it won't be much higher," says Chokhani. "The economy is fine, but there's a price for everything." Maybe so, but right now, the only price investors in India are paying is the cost of a nice a bottle of champagne to celebrate their good fortune.