Business   

Time for stock markets to turn sober

Political stability and economic performance should decide sentiment

RECENT MOVEMENTS in Indian stock prices have attracted much attention especially after the unprecedented fall from the all-time peak levels. Many analysts see in the violent price movements a long overdue correction. The more optimistically inclined among them maintain that amidst all the carnage some good may come after all.

It was certainly naïve for anyone to think that the market would keep going up taking in all the good news (as it should) and completely ignoring the negative ones. That is what it seemed to many just three weeks earlier when the Sensex and the Nifty were seen incapable of coming down.

The Sensex was believed to have the momentum to go past 13000. Many sections of the financial press had recorded the speed at which the Sensex had moved up from one milestone to another, from 9000 to 10000 and so on, pointing out that each subsequent thousand had come more quickly than the previous one. That such accelerated climbs are gravity defying and hence inherently unstable must have been known but very few had publicly expressed such contrarian views.

Share prices did move down on occasions even as they were seemingly on an upward course day after day. But the unprecedented highs recorded by the Sensex and the Nifty and their apparent propensity to maintain those levels probably led to a belief that nothing, internal or external, would upset the applecart. It is not of course the first time such naivete has been so widely shared. In fact, even in countries where there is greater understanding of the stock market mechanism, there were times when irrational optimism — a far more popular expression is irrational exuberance — has taken over from logical analysis. The boom and bust in the technology sector (dotcoms) in U.S. stock exchanges at the turn of the century had major consequences everywhere and not just for the stock markets.

Sensex on agenda

The distinguishing feature this time is this. Even the Government and the policy establishments, traditionally sceptical of the share markets, have appropriated the high stock indices to their agenda of projecting an unabashed economic success story.

Since when did a high Sensex find a place alongside strong economic fundamentals in the official report card? There is not a little irony in the following.

The UPA government, even before it was sworn in, was greeted with a sharp drop of 564 points (in the Sensex) on May 17, 2004. It was widely speculated that the new government would not adopt "market friendly'' policies. Some statements of politicians whose parties were lending support to the coalition government were believed to have brought down the market then.

But it was under the UPA government that the stock markets reached their peaks. Until May 19 this year, it seemed that the stock markets could not have asked for anything better from the government. So complete was the apparent harmony between the two that the absence of any major reform measures — further disinvestments, for instance — did not discourage the markets. Of course, the Government abolished the long-term capital gains tax on share transactions and generally espoused policies that favoured investors. In a few areas, notably in the requirement to check the antecedents of certain categories of overseas investors (through the FII route), the Government has been remarkably generous, going to the extent of overruling the Reserve Bank of India which had advocated caution.

It is hoped that it will not rue that decision, at least not during this phase of stock market gyrations. Sooner rather than later there will be a probe to identify the "bad guys''.

But to get back to the irony: almost two years to the day after the Government took office, the markets tanked, having scaled several peaks in between. It is the Finance Minister who has been doing his best to "talk up'' the markets.

The Government has a stake in the capital market. Protecting the integrity of the market mechanism should be certainly high in any government's agenda. But beyond this, should the Government be really concerned with a particular level of Sensex or the minute-to-minute movement of share prices?

Not a true barometer

Which brings us to the oft-repeated question: is the share market in India a good enough barometer to test or gauge economic policies? That question is as valid today (after the crash) as it was when the Sensex was above 12500 in the first week of this month.

Surely nothing fundamentally wrong has happened in the intervening period, either a calamity or a drastic revision in the economic prognosis to warrant such a precipitous decline.

It is true external factors count far more in the stock exchanges today than they did a few years ago. Among the major influences this time have been the so-called "global imbalances,'' the phenomenon of the U.S. running huge current account deficits only because other countries, notably Asian ones, park their large savings there. Such an asymmetry was not expected to last long. The only question was whether its unwinding will happen in an orderly fashion. That of course depended on a high degree of co-ordination among countries.

Oervalued assets

There is enough evidence to show that stock markets in many countries have gone down, although the extent of declines has varied.

Currency markets too have been volatile and many types of assets have been overvalued. Commodity and metals prices declined sharply, prompting a negative reaction in India.

Besides, petroleum prices continue to be a cause for worry. FIIs which have a large stake in the equity markets are bound to be influenced by global factors.

Yet it is ultimately the Indian story, political stability with decent economic performance that ought to be deciding the sentiment towards India and its stock markets.

On that score, the sudden fall in the stock markets suggests that the market mechanism, though considerably evolved, is still not good enough to be a barometer of the economy.

C. R. L. NARASIMHAN

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Time for stock markets to turn sober
The week in the stock markets
Hard options in oil pricing
TDS duty cannot be bypassed
Indiscriminate use of summons is avoidable
Reblogging junk free webfeeds

Copyright © 2006, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu