So are golden days at Indian stock exchanges back again? If we trust industry experts we have reasons to believe them! Flashback to January 8, 2008 when Sensex reached its historical high of 21,073- Investors were betting on 25,000 high by the end of 2008. However, we all know what happened to Sensex within a year- it went down to 10,000!! Did industry experts got it wrong in 2008 but will get it right in 2010? That’s what most of you would be wondering while reading this article!

I believe it is extremely unfair to blame experts or investors to blame for the fiasco because everybody including you and I were busy enjoying see our investment portfolio swell and Sensex going up every day. We chose to ignore all the warnings coming from market, institutions and experts as we were happy in our own fantasy world. We knew that western economies were lending at very low interest rates and thus creating asset bubble which was waiting to bust. Anyway let us move on

I believe world economy and more so financial markets are less risky due to cleansing of high risk derivative products such as Mortgage Backed Securities. Fundamentals of most of economies are strong or getting stronger after the crash. Let’s look at Indian economy- It has grown by over 7.5% in the last financial year and is expected to grow by 8% this year. So if the Indian economy continues to grow at an average of 8.5 per cent per year until December 2015, if there is no double-dip recession in developed countries, if the Indian rupee continues to trade around Rs 46 to the US dollar, then the Sensex should be comfortably placed at 15,622 on March 31, 2010, and around 50,130 in December 2015.

Also, Indian stock market is not overvalued as it was in 2007-08. If a country's market capitalisation as a proportion of global market capitalisation mirrors its share of world GDP, India's stock market seems to be within 15-20 per cent of where it should be. In 2007-08 it was almost 25% overvalued, which was also a sign of pending crash that we chose to ignore.

Even though the Indian stock markets will continue to be fairly volatile for the next few years, an investor who takes a long-term — a five- to six-year — view is likely to be rewarded very well, especially after taking dividends into account.

The future of Indian stock market is heavily dependent on the following three parameters:

• Future growth of the Indian economy, annual inflation, and productivity related improvements;
• The inflow and outflow of foreign institutional investment; and
• Any movement of price-earnings ratios.

India' economy grew at an annual rate of 9.4 per cent during the three years — 2005 to 2008 — with agriculture averaging around 5 per cent per year. India also survived the global meltdown of 2008-09 due to minimal exposure of the financial sector to the sub-prime lending, and domestic demand driven growth. India's average annual growth rate during the two years, 2008-2010, was likely to be around 7 per cent (in real terms), with the current fiscal year outperforming the last one by over one per cent.

Favourable demographics, high savings rate, rising middle class, and underleveraged households suggest that domestic demand, and the economy, will continue to grow strongly.

Taking a long-term view and assuming an exchange rate of Rs 46 to 1 US dollar, an annual growth rate of 7 per cent in 2009-10 and 8.5 per cent during 2010-16, the market sentiment being overly buoyant, an inflation of 6 per cent per year, the size of the Indian economy in nominal terms is likely to be:

• $1.250 trillion in 2009-10,
• $2.400 trillion  in 2014-15,
• and $4.640 trillion in 2019-20.

This implies a cumulative nominal annual growth of 14 per cent and an approximate four-fold increase in the coming decade.

• The services sector would account for approximately 56 per cent of the Indian economy;
• The manufacturing and industries sector would contribute about 29 per cent; and
• Agriculture about 15 per cent.

Between 2005 and 2008, both, the services and the industries sectors grew at approximately 14-15 per cent on a nominal basis and 9-11 per cent in real terms. These sectors are likely to grow between 15-16 per cent in the next six years.