Last Friday, it closed at 4,618--roughly where it was two months ago. In July, predicting a Sensex level of 5,000 after the Kargil war should have been a safe bet, but look how silly it all sounds now.

I feel that the whole business of index forecasting is a bit foolish and irrelevant (though I have done my share of it) because nobody actually invests in the index (barring a few index-tracking funds). One may invest in some of the stocks that underlie the index, but that's about all. However, the index seems to have an enormous capacity to influence investor sentiment; that is why it is equally pointless to ignore itstrajectory.

The foreign institutional investors (FIIs) have understood this better than anyone else. Once regarded as suckers by most domestic market operators, the FIIs of today can teach them a thing or two about market behaviour. They have, for example, adopted the twin strategy of making sure that the main stocks that propel the Sensex do not fall much even as they focus on churning their own portfolios to advantage. Moreover, they have also learned to play the rumours game. One only has to spread the word that "the FIIs are buying (or selling)," and the markets start moving in the direction indicated. A close scrutiny might show that these rumour periods provide FIIs with adequate cover to buy or sell, if they want to.

Does all this mean that macro factors and fundamentals do not matter? No, they do. But the relationship between macroeconomic factors and macro/micro market trends is not a straightforward one. One has to make allowances for market psychology, and figure out who's using it in what wayto make short term money. The real winner is the one who can combine short-term knowledge with a more fundamental understanding of macro trends. So what factors will most influence Sensex changes over the next three months? There are four such factors:

Factor one is the general elections. If, as seems likely, the elections result in either a hung parliament or a BJP-government with a slim majority, the markets will continue to mark time for a few weeks before making a decisive move one way or the other. Which way that will be is difficult to say now, since it is the shape of the government and its expected longevity which will decide that.

Factor two is more or less certain. Whatever the shape of the government, the fiscal policies it must pursue are predetermined. One near-certainty is the prospect of a Kargil tax. Whether this will take the form of a direct tax surcharge or an across-the-board increase in indirect taxes (like Chidambaram's surcharge of 1997), one can't say now. My bet is that the bulkof the taxation will come in the form of additional excise and customs, since that is politically easier to pass on.

Factor three, once again, is a surety. The prices of petrol and diesel will have to go up, thanks to the consistent rise in international crude prices. This should happen almost as soon as the elections are over.

Factor four relates to the market itself. Many companies are beginning to think about tapping the capital market again. The infotech sector is already beginning to lead the IPO charge, and the rest of the financial year will surely see a lot of them. The same holds good for rights, public and disinvestment issues by companies, banks and public sector companies.

Clearly, the last factor is at least as important as the first three. With a gradual buildup in IPO activity, the overhang of fresh equity is likely to soak up a lot of the public's money. More so since the new issues are likely to be less aggressively priced than in the past.

If this holds true, the chances are thatmost of these issues will be financed by selling currently high-priced shares in the market. And the most high-priced shares are Sensex staples like infotech and FMCG scrips.

Against this backdrop, and taking all these factors together, I have come to the conclusion that in the near term at least, the "fundamentals" are against a northward move by the Sensex. The point is not whether the Sensex will cross 5000 or not, but whether it will really gather the steam to rise further from there.