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Market mayhem and clueless investors

Even by the recent standards of stock market behaviour, this week's movements in the benchmark indices can only be called, for want of a better expression, extreme. On Monday, May 15, the Sensex, continuing a weak trend of the previous week plunged by 463 points to close at 11822. There was a recovery of sorts on Tuesday followed by a spectacular bounce back of 344 points on Wednesday. At that stage, many experts were prepared to believe that the market had shrugged off its recent concerns and was back on course to regaining its momentum that fuelled an extraordinary upward run over the past five months taking the Sensex close to 13000. Inevitably many records have been broken, first when the indices moved relentlessly up and, now, when they plunged. Monday's decline in the Sensex was its biggest one-day fall since May 17, 2004, when apprehensions over the new United Progressive Alliance Government's economic policies brought the markets down. That paled into insignificance on Thursday when the Sensex lost 826 points, the highest in its history. On Friday, the markets continued to be extremely volatile and closed 450 points down. From the previous week, the Sensex and the Nifty have come down by more than 10 per cent. Volatility is perhaps inbuilt, with stock prices being driven in part by fund flows. Indian markets have grown substantially in depth recently. The markets are also increasingly more globalised, with foreign institutional investors (FIIs) emerging as the most significant players. There has also been a due recognition of Indian stocks in the emerging global market indices. Recently the pool of FII money has become more broad-based, with investors from non-traditional destinations such as Japan joining in.

It is inevitable therefore that the stock markets in India would be influenced considerably by global developments. Recent declines here have followed happenings in Asian markets, which in turn are taking cues from the NASDAQ and the New York stock exchanges. The biggest concern has been over the uncoordinated unwinding of "global imbalances," basically the unsustainability of the huge current account deficit in the United States being funded by the savings of Asian countries. Recent concerns over inflation in the U.S. have led to speculation over an interest rate hike there. That might cause some FII money to be redeployed from emerging markets to the U.S. The latest decline in the Sensex is also attributed to a wrong interpretation of a draft official circular suggesting FIIs would be taxed more. The Finance Minister has denied such a move but the fact that the market could go into a tailspin over a misleading report reveals its nervousness. Corporate results in India have continued to be good but a nervous market seems to latch on to any odd unsatisfactory performance to go into a decline. There are very few options left for the average investor. Even the mutual fund route is proving to be very risky.

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