Something like two billion dollars came into the Indian stock market last month; another $1.27 billion has already come in so far in March, and it seems that nothing can stop the wall of money that is still headed our way.

When the dollar inflow into the market is 0.5 per cent of GDP in less than six weeks (more than the total domestic money that gets put into the market in a whole year!), it is time for the authorities to sit up and ask themselves some questions.

First, is there a good and (more important) sustainable reason for so much money to be coming in? Second, how much longer will the flow last, and how high are Indian stock prices headed as a result?

Third, how easily or quickly can this flow be reversed, and what could be the consequences on the stock market? Finally, are there larger macro-economic and political consequences to be watchful about?

The time to figure out the answers is when the situation still looks good, not when a stock market bubble has already built up and must therefore burst with the force of an earthquake.

For, if that happens, it is usually the ordinary retail investor who gets hurt the most--because he is the last guy to have come in, and will not be able to exit as fast as the professionals.

Indeed, if retail Indian money is still staying away from such a bull market, it is because people have not forgotten what they lost in the crashes that followed the bull runs led by Harshad Mehta and Ketan Parekh. Twice bitten, eternally shy.

To return to the first question, although there are a goodly number of stocks which now have price-earning multiples of 30, 40 and more, the market as a whole still seems reasonably priced--not only by historical benchmarks but also in the context of the fourth quarter results that will start coming in next month.

If they sustain the momentum of recent quarters, then some stocks might look positively cheap! Besides, the buoyancy in Indian stock prices is matched by what has happened in other emerging markets--so we are not the outliers here.

And finally, the India story has rarely looked this good, so investors can hardly be blamed for being bullish, especially when the returns in the debt market are so ordinary. Where else are they to put their money anyway?

The second question is whether we are at the end of one phase. It doesn't look like it just yet. By all accounts, more global capital is headed India's way.

And the domestic mutual funds are finally getting a good response in the retail market. It is conceivable, therefore, that the market has some headroom left. While predictions can be hazardous, a dizzy Sensex level of even 8,000 no longer looks beyond the realm of possibility.

Fair enough, but money that comes in can go out. And I would start worrying a little bit when you hear investors buying today because they know that others will be buying tomorrow.

If the story were a purely domestic one, the risks would be easily contained. But when the market is driven increasingly, if not wholly, by the decisions of investors in other countries, the risks multiply.

We saw it last May, when a sudden change of expectations with regard to US interest rates saw money flowing out and the market tanking.

And with evidence that something like half the money coming into the market today is probably hedge fund money, the risk of greater market volatility has increased. In other words, someone in the market regulator's office and in the finance ministry should be asking the question: what if?

Back in 1997, India took credit for having escaped the ravages of the Asian financial crisis that swept so many economies into the abyss; some countries even saw political turmoil.

We are more integrated into world markets than we were then, including the capital market, so any international flu may hit us pretty quickly.

The impact would be on the stock market, on the rupee's external value and on interest rates--in other words, on the real economy that is chugging along so nicely today.

Do we have defences against "emerging market flu", or are we in the hands of the FII and the hedge fund?