Fund flows hold key to Indian bull run

With the Sensex crossing 8,000, the question on everybody's minds is that how far can the current rally last.

Will the Sensex sustain at this level or face a correction? What are the risk factors that could derail the applecart?

Analysts opine the Sensex has achieved targets much faster than expected and, going forward, markets will be driven by technical factors. However, major corrections are not expected.

According to Manish Shah, head of equities & derivatives at the Mumbai-based Motilal Oswal, the rise in index has been better than expectations.

"We had estimated an EPS of 576 for FY06E and of 637 for FY07E. We had set a target of 8,281 over a year, which has been nearly achieved in just three months. That is the crux of the matter. Going forward, technical factors such as fund flows will drive markets. But it is difficult to predict the direction of fund flows and further target numbers," says Shah. 

Analysts note foreign fund flows have been strong in early-August, while in the later half there was a net outflow.

Stocks just got costlier

This was attributed to rising crude oil prices, stretched valuations and worries of fiscal deficit.

Even though oil prices have climbed down from a record high of $70, their impact is still being felt. During the past month, the effect of rising crude oil prices had a negative impact on markets across the globe. "It continues to be a worry," says Shah.

However, he notes that markets have already discounted the recent domestic oil price hikes to an extent.

Another concern is that a rise in rates could have a negative impact on equity markets. Some analysts have also noted that rising valuations could impede foreign institutional inflows.