Dalal Street dhamaal: What's driving the rally?

Excerpts from What's Hot on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

On Dalal Street, the fireworks continue.  The Sensex has gained for the seventh week in a row, making this the longest winning streak since April 9, 2010. CNBC-TV18's Harish Rao and Supraja Srinivasan find out what's behind this rally.

Global risk appetite is returning. Proof: the unprecedented USD 4.4 billion in foreign flows that have come in since the year began. These inflows have played a huge part in the Sensex surging 18% this year, making it the best performer in Asia.

Factors like lower inflation, rate cuts and a recovering rupee have worked in India's favour. But some experts point out that fundamentals are yet to catch up to the fact that this is largely a liquidity-led rally. They add that domestic institutions have been selling into this rally, so it could fizzle out when liquidity dries up.

Neelkanth Mishra, head - equity strategy India of Credit Suisse says, "This is completely a global rally. I won't prescribe any Indian reasons to it. It's a global liquidity rally and whenever that ends, it will start reversing."

So, the government will have to consolidate its fiscal position to keep the momentum strong. The rally has been primarily led by beaten down mid-caps and smallcap stocks in financial, power, infrastructure and the capital goods space.

For instance, stocks like HDIL, Orbit, Lanco Infra, IVRCL, which were amongst the most beaten down stocks in 2011, have given over 100% returns since the beginning of the year. But experts warn that some caution should be exercised since when the winds will change is anybody's guess.

Market next week: It's time to be cautious now, say experts

Trader Atul Suri says, "There are very few people who are participating in this rally. Everyone can give you five reasons as to why this rally isn't justified and why things are not good. But the fact is that let's not limit it because we don't know where this can go. The best thing is for you to limit where or till what risk can I take, 2%, 5% 10%, 20% and I guess ride it."

For now, the going is good. But analysts say the economic outlook is still a little tepid and the Budget will provide the next big stimulus either way.