Are indices true indicators of Market Condition

Our economy is growing and the Gross Domestic Product (GDP) is predicted to be between a good 7.5% to 8.5% in this year, but then the markets plunged because of the perceptions of the investors and traders, which in turn is influenced heavily by the “herd mentality” causing panic and mayhem in the markets, resulting in the indices shedding points massively. Later the Finance Minister’s addressed the nation on Monday reassuring that the Indian economy is good and the root cause of the present uncertainty is liquidity and not any dramatic change in the fundamentals of the economy. He also stated that preventive steps were being taken to ensure the protection of the Indian economy and an additional Rs.600 billion was infused into the market (see http://www.indiainfoline.com/news/innernews.asp?storyId=81377&lmn=1 for further details). This created a positive wave and the “herd mentality” played its part, but this time, positively, resulting in the stock market indices gaining points.
The indices are supposed to be indicators of the market condition; but the fact that they are also, to a great extent affected by and represent the general perceptions of the investors (noise element) more than the real news or events, can not be ignored.
Thus it can be seen that though the indices SENSEX and Nifty serve as a popular investor’s guide, it is riddled with imperfections which can also lead to confusion instead of providing aid and it is a double-edged sword indeed. So they do indicate the market conditions, but are also to a significant extent, representations of market sentiments (i.e., sentiments of the traders and investors).
And its true that….“It’s ironical that something as huge as a stock market which should be stable as it represents the economy of a nation, is actually extremely volatile since it is driven more by the sentiments of the people