The ‘efficient market hypothesis’ which advocates that markets are generally both rational and efficient, and serve as reasonable leading indicators of economic and corporate developments is having its greatest impact on Indian stock market. Nonetheless, as an investment professional I must continue to make informed judgments about where the Indian stock market is headed, based on my investment experience and using historical data. The Indian market went through an unprecedented five-year bull market, beginning in 2003 and running until the mid January 2008, fueled by over $50 billion in FII inflows in the economy. During this five years, corporate earnings surged at an unparalleled annualised rate of 32%, while multiples expanded from 9x to 19x at their recent high. Since last January India’s stock market sell-off has been equally intense, accompanied by higher credit costs, galloping inflation, lower industrial and agricultural production, and several high-profile earnings disappointments. Although recent quarterly earnings growth has remained at a high altitude, the trend has been one of QoQ deceleration, with contracting EBITDA margins (23% vs 26% last year) and net profit growth of 22% compared to 32% of 2007. The worrisome rising commodity prices, particularly oil, of which India is a net importer, are likely to strain margins and earnings growth for the near future. It is instructive to look at India’s high inflation environment in the mid-1990s when there was lack of FII, political instability and the LPG was at its nascent stage. In contrast to that, today, market multiples have already contracted to 14x. Moreover, in addition to lower inflation, today’s GDP growth is forecast at a constant7%+, versus only 6.3% in 1994. In short, a strong argument can be put forward that the economy, as well as the market, are in better shape today compared to the nineties. However, the situation can take a U turn if oil prices continue to rise. India’s net imports of oil as a percentage of GDP is likely to rise to 6% in 2008, and research shows that every 10% increase in oil prices can shave off at least 0.1% in GDP growth and add 0.4% to the inflationary pressure. Much, then, depends on where oil prices are heading, not something anyone can confidently predict about the volatility of the stock market. No economy in the world is without challenges in such a situation. With the hike in the oil price, many of these appear less daunting than they have in the past. Combined with a growth to valuation profile that remains attractive relative to global peers,i can undoubtedly argue, the Indian stock market can avoid a further significant de-rating, unless commodity prices continue to rise.