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Booming, but weaknesses persist

By most yardsticks, 2006 was a memorable year for the Indian stock markets. The benchmark indices, the Sensex and the Nifty scaled new highs. The Sensex moved past 14,000 at one stage and closed the year at a level not considerably lower than the peaks it had scaled earlier. The broader 50-stock index, the Nifty too set a record by going past 4,000 for the first time. Over the calendar year the Sensex has appreciated by nearly 47 per cent, capping a heady three-year record run. Indian stocks have been performing very well even by global standards, against which they are being increasingly benchmarked. Foreign institutional investors have continued to favour Indian bourses: last year they invested nearly $8 billion on top of almost $10 billion in 2005. There has been a spurt in foreign direct investment as well, strongly suggesting that the Indian economic growth story has gone down well with many other types of investors, including those who are in for the long haul. Economic growth in India has comfortably averaged 8 per cent recently. The target growth rate of 9 per cent seems eminently achievable this year as well as over the next few years. Corporate results have been consistently impressive.

However, for all their positive features, Indian stock markets continue to exhibit many of their well-documented weaknesses. There is a strong case for developing a debt market for attracting long-term investors. Its absence is keenly felt at a time when infrastructure funding has become a critical task. Besides, the opening up of the pension sector will get widespread support if the fund managers are able to invest large sums in debt instruments too. Another persisting weakness is the absence of a large number of retail investors even in buoyant markets. The number of demat accounts has not shown any significant increase over a decade. Given the extreme volatility that continues to bedevil stock exchanges, the average investor is probably better off staying away. Institutions have a greater staying power. More fundamentally, the dominance of the foreign institutional investors and domestic mutual funds has been the principal cause for wide swings in the market. Although stock market regulation has been tightened considerably, it has not been possible to eliminate gross irregularities. The demat scam of last year was unique in that its perpetrators were well-known intermediaries. Also, retail investors have reasons to complain about the complexity of trading rules — even in opening trading accounts — and high demat charges. It seemed simpler to follow official advice and invest through mutual funds. But there again, even the best performing funds have significantly underperformed in relation to the Sensex.

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