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BLACK MONDAY

MANMOHAN SINGH'S ATTEMPTS to calm the stock markets, although shorn of specifics, were initially successful. Promising to do everything to promote the health of the stock market, he urged investors not to panic. By noon on Monday, when the former Finance Minister spoke on television, the Indian stock markets had been shut down — for the second time — in less than two hours of extremely volatile trading. The stock indices had dropped precipitously: the Sensex by 786 points and the Nifty by 276 points. For the first time ever, the stock exchange rules on circuit-breakers (which automatically shut down trading when there are violent movements in the indices) came into play. A rally in share prices did lift the indices above their lowest levels but the day ended with the share indices, Sensex and Nifty, lower by 564 and 194 points respectively, their highest single day falls. Even the Reserve Bank's timely commitment to support settlement banks with unlimited liquidity did not help sustain the mid-afternoon rally, although it probably averted the threat of an imminent settlement crisis with its attendant serious systemic implications for the capital market. That danger will, however, not be far away given the unprecedented market gyrations and, equally importantly, the absence of logical explanations. Without these, remedial measures will be hard to come by. In just about a week, the Sensex has declined by 1500 points during a period when there has been no change whatever in economic fundamentals.

There is broad agreement that the election verdict, which was totally unexpected, introduced a measure of uncertainty in an economic as well as political sense. While the new alliance has yet to finalise its common minimum programme, statements by some Left leaders criticising the privatisation programme of the outgoing government are being blamed, indeed scapegoated, for denting market sentiment and setting the stage for the steep fall in the indices. The market operators are evidently putting tremendous pressure on the shaping of economic policies in a sharply changed political context. Investors of many categories have viewed the privatisation programme favourably. They were able to buy into profitable companies, often at a discount to the market price, and had a chance of acquiring more if the programme continued at the same pace. Stocks of many companies and banks in the government fold were quoting at high prices in the expectation that the new government would divest further in them. Although by Monday spokespersons of the new alliance softened their tone, market valuation continued to take a beating. However, many analysts see the possible stalling of the privatisation programme merely as a trigger. There were other negative factors at work. The persistently high global oil prices (they went through the roof on Monday), the ongoing recovery in the United States leading to a reverse flow of capital, and the general decline in Asian stocks have all contributed to the negative sentiment. Foreign institutional investors and portfolio managers — the main props to the Indian markets — have been net sellers for almost ten days before May 13.

While the outlook over the next few days does not look promising, it is likely that there will be more optimism after the contours of the common minimum programme are known and the new government gets round to implementing them. Steps to restore the market's health ought to be high up on the regulator's list. Reducing the overdependence on foreign institutional investors has long been thought of but the investor base continues to be lopsided. In the end, volatility hurts investors far more than political statements do. The fact that the stock markets can react so violently is an ominous reminder that all is not well with them.

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