Ramashankar Gupta is a small wholesale fruit trader from Shahadra, a suburb on the fringes of north Delhi. At 9 AM one morning, like every weekday morning, instead of visiting his wholesale fruit outlet in Azadpur Mandi, he makes himself comfortable in front of the television set in his modest sitting room. He is all set to do some serious trading - but of another type. He is a daily trader in the Indian stock market, which has been booming for the last three years despite some occasional hiccups - at times rather severe. However Gupta is undeterred. He continues to look out for good tips on the CNBC network, his limited English language grasp notwithstanding. The desktop computer is switched on and the broadband internet connection enables him to log on to his online broker once he zeroes in on one of his buys and sells for the day.

When he began dabbling in the stock market a decade ago, Gupta had to depend on the friendly neighborhood broker who often took him for a ride, trading penny stocks that sometimes earned him a pittance but usually ate away his capital. Today, he trades online using the services of a website that provides him the best research.

Thirty-five year old Gupta seems contended with his success, after all, he has built a decent house from the profits he made over the last 10 years, buying and selling scrips of Infosys, Wipro, Bharat Forge and a host of other companies that have hogged the limelight since liberalization and outsourcing became household words in India. He balances his portfolio by hedging in the Futures and Options (F&O) contracts that have also gained popularity, particularly the F&O index of the National Stock Exchange (NSE), since its inception a few years ago. Gupta says that he is better off leaving his fruit wholesale business in the care of his manager.

The Indian stock market has, of course, seen many ups and downs in the last few years and small investors like Gupta have burnt their fingers once or twice. In fact, many upward spirals of the stock market in the past few years have been halted by scams and scandals. In 1992, it was Harshad Mehta and in 2000, it was Ketan Parekh whose ingenuity in manipulating the market brought it crashing down. In 2006, however, the IPO scam in which a handful of investors cornered a big chunk of new issues through forged multiple Demat accounts and tax identification numbers, could not create much of a dent. After a minor fall, when the two involved brokers were pulled up and threatened a ban, the market recovered immediately.

There seems to be more confidence in the regulatory mechanism of the Indian stock market today than it was some years ago. Gupta can now open up his purse strings without fearing the lurking shadow of a Harshad Mehta behind his back. The setting up of the high-tech National Stock Exchange in 1994 brought an end to the physical haggling and wrangling on the exchange floors and altered the set of rules of the game. Capital market reforms over the last few years have made the Indian stock market one of the most developed in the world. Just a few years ago, one-tenth of all paper share certificates were forged, settlements were delayed for months and thin turnover was allowing brokers and companies before IPOs to rig prices. Today the market is characterized by paperless transactions and high trade volume for companies with good governance and transparent accounting, eliminating most types of the frauds and forgeries.

The fact of the matter is that the face of the Indian stock market is quite different from what it was in the last decade. In the early 1990s, the market was a fledgling one in terms of market capitalization, despite the 3,000-odd companies listed in the Bombay Share Exchange (BSE). Speculators ruled Dalal Street, India’s equivalent of Wall Street, and about 30 scrips saw all the trade volume turnovers. Unit Trust of India (UTI), the largest government-owned mutual fund, was the major institutional player, buying when it thought the market was overheated and selling when there was a shortage of scrips. There was hardly any regulation except the Comptroller of Capital issues that had to clear all new issues. The establishment of the Securities and Exchange Board of India (SEBI), after some years of teething troubles, seems to have brought the market to adulthood.

In 2006, market capitalization equaled the GDP, which many analysts consider a sure sign of the maturity of the stock market of a country. In 2003, the M-Cap-to-GDP ratio in India was 28%. On April 20, 2006, before the bloodbath in May when the market fell by 20% in two weeks, the BSE Sensitive Index (Sensex) was at par with Dow, FTSE and Nikkei, with an M-Cap-to-GDP ratio of 100%. Historically, this ratio for India has been around 20-25%, except for a brief period during the tech boom in 2000, when it shot up to 50%. While Malaysia and Taiwan has ratio of over 100% and the developed world 100%, India is not to be left behind.

The Indian stock market was opened up to foreign investors in 1992, a year after the all-round economic liberalization ushered in by the then Finance Minister who is now the Prime Minister, Manmohan Singh. In 1993, a handful of foreign institutional investors (FIIs) – 18, to be specific – were investing in India. Today there are 882 FIIs including about 100 new ones, which registered with the SEBI in 2006. Even the large pension fund, CalPERS, whose investments are tracked by many global institutional investors, entered the Indian market in 2004.

In 2005, the FIIs pumped in a record $10.5 billion in Indian markets. Only Taiwan, among the emerging markets, with $12 billion had attracted more FII investment. In the first quarter of 2006, the FIIs have invested $3.63 billion in India. New funds from Japan and West Asian countries, besides the traditional ones from the US, Germany, Luxembourg, Singapore, Australia and Denmark, have been eying high returns from India.

For sure, the market has witnessed high volatility as the indices yo-yos on the back of domestic policy announcements as well as global events. The huge FII inflows have its share of risks. Alignment with the global economy means that the movement of emerging markets influences the Indian market, which moved in isolation till it became dependant to the foreign funds. Still, FII ownership of the market, which is at 20%, is limited in contrast to many other countries so the downside risks are limited, as Anup Maheshwari, Chief Investment Officer of HSBC Mutual Fund feels.

The SENSEX has been rising since May 2004, except for a brief fall when the Communist Party of India (CPI) supported Congress government came to power. On the eve of the Congress-led UPA (United Progressive Alliance) government’s ascent to power in May 2004, the SENSEX was at 4,427. It breached the 11,000 mark for the first time in March 2006. From January to April 2006, the SENSEX appreciated by about 20%. By the end of May 2006, despite the SENSEX falling by 1,100 points in two weeks taking cue from other emerging markets, it was still over 10,000, earning those who held on to their investments from 2004 a return of 125% - at a time when the average interest rate from bank deposits are just 5% per annum. Many of those who invested in mutual funds saw their investments in 2005 appreciate by as much as 100%. The index itself rose 40% in 2005. And over the last five years, it has gone up by over 200%, compared to just 10% in the United States.

Global investment funds have been flowing to the emerging markets since the beginning of 2006 and India has grabbed a major share of this. While other emerging market indices rose by 4-5%, the SENSEX rose by nearly 20%. Many analysts believe that as a result of huge liquidity flows, Indian stocks are overvalued and the May correction was necessary. “The market was fuelled by increased liquidity with foreign investors as well as domestic funds pouring money to take part in the bull run”, said Deepak Shah, an equity analyst with Mumbai-based brokerage, Pranav Securities.

“A robust economy, impressive corporate earnings growth, stable interest rate and rising profile of domestic companies overseas have mainly contributed to India becoming a hotspot for overseas fund managers”, said KK Mittal, VP of New Delhi-based Escorts Mutual Fund.

The Indian economy grew by 8.1% in the fiscal year 2005-06, up from 7.5% the previous year. Thus, India recorded the highest growth rate after China, leaving behind Brazil and Russia, the other two countries of the famed BRIC group. The economy withstood negative events like the tsunami, flash floods in major cities including the finance-capital Mumbai last summer and the spiraling oil prices. Much of the growth was generated by the manufacturing sector, which restructured its finances during the lull of the first few years of the millennium and now returned to capacity-addition mode, as well as the services sector, which has continued to boom. Stock market reforms and FII inflows have allowed companies to raise funds for expansion and reduce debt, thereby limiting interest outgo. Export earnings and FII inflows have together contributed to amassing of a huge foreign exchange reserve of $163 billion.

The long term outlook on the Indian economy continues to be buoyant despite the rupee losing ground to the dollar in the recent months, affecting India’s imports, 70% of which is oil. On the other hand, rupee depreciation benefits Indian exporters, particularly those exporting software services to the United States and hedges against the fall of dollar against other currencies. The corporate results announced for the financial year closing March 2006 were healthy and so is the consumer confidence index.

There is one caveat to the Indian stock market story, however. According to data released by the Reserve Bank of India for 2004-05, household financial savings comprised only 13.7% of the country’s GDP. Of this financial savings, a meager 1.1% went into stocks and debentures.

So, Ramashankar Gupta and his ilk make up only a drop in the ocean that is the Indian stock market. Indians, including the cash-rich businessmen and politicians, continue to invest bulk of their savings in real estate and gold. It is the FIIs in search of high returns that are making or breaking the Indian stock market today. The FII funds will flow in to the markets that will give them the highest returns. A recent Price Waterhouse Coopers report has identified a group of seven emerging economies that will be in the forefront of growth till 2050, with India leading the pack. Hence, the party is expected to continue for some time to come.