As the markets look forward to almost Rs 10,000 crore (Rs 100 billion) of fresh equity offerings coming into the primary markets later this year, there is growing optimism that the supply of good quality paper may lead to a drop in valuations of existing companies, albeit with a lag of about six months.

Industry data shows that issues from companies such as Tata Consultancy Services, Bharat Petroleum, VSNL, IBP, IPCL, Patni Computers, Uco Bank, Vijaya Bank, Indian Overseas Bank, Dredging Corporation, CMC, Biocon, Mahanagar Gas, Indraprastha Gas and some others are in the pipeline in the next six months.

This is the first time in recent years that so much paper is hitting the market in a short burst.

Indeed, one foreign brokerage house has estimated this supply at about 60 per cent of the peak supply during the height of the technology bubble.

The foreign brokerage calls this a "potential stress point" for a certain section of the market.

A recent report by a foreign brokerage said, "It (the oversupply) is a matter of concern, keeping in mind the way the market have historically reacted to such supply".

According to equity analysts, both the actual level of equity supply and the equity returns have an impact on the rest of the markets, but this impact is felt with a lag of about six months.

The recent outflow from domestic mutual funds also indicates that retail investors' appetite for paper is weak, notwithstanding the huge response to the recent Maruti initial public offering.

The report indicates that the coming year may still be a strong one for equities. The year could be altogether different from the current year, especially if the general elections result in narrow coalition government.

The monsoons have been good thus far and agricultural growth is likely to recover for 2003-04. The positive impact of industrial growth should also be felt in 2003-04.

Moreover, the report said that there is a probability that free liquidity will lead the market by 6-9 months, that is the trickle down from the current bout of good liquidity will translate into market-wide good performance in 2-3 quarters.

Over the last few months, the market seems to have performed well riding on the back of foreign flows but domestic flows are still erratic, with the result that free liquidity is still turning down and relative valuations have entered the 'overvalued' terrain.

"We believe that a sudden increase in the trade deficit does not represent accelerated consumption as industrial production growth numbers are slowing, and inventory is building in the system.

"This is also suggested by the gap in credit and industrial growth and rather represents a substitution of local production with cheaper imports due to currency appreciation. This currency gain-led substitution could affect almost all sectors, with the execution of certain industries such as cement, commercial vehicles and banks, where imports are difficult or impossible," the report says.

"The recent reduction in the current-account surplus caused by the expansion in trade deficit is thus not good news for Indian equities," the report added.

Analysts have been optimistic and some of this optimism is now being purged, particularly in such areas as software services, telecom, healthcare and consumer staples.