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Shoring up confidence among investors

The global market turmoil is continuing unabated and Indian markets are no more insulated. Indian investors are waiting for the next trading day anxiously as the meltdown elsewhere in the world, especially in the U.S., is an indication to the domestic market.

Prime Minister Manmohan Singh aptly remarked “We are not immune from what happens in the outside world. But we are not vulnerable to the extent that some other countries are vulnerable.” His remarks were a cautious one, especially from a reformist premier. The message was clear; Indian markets are no more insulated.

Why India is not insulated? Dr. Singh gave the answer: Global crisis could lead to a decline in capital inflows because foreign investors are likely to face liquidity crunch and take out money from the country. In such a situation, the stock markets would be affected and the Indian corporate houses would have difficulty in raising resources abroad. He also said that “if there is a recession in the developed world, particularly the U.S., it could hurt our exports.”

He also feels that the international financial crisis will help moderate inflation at home. Luckily for India and the rest of the world, falling oil prices, which is ruling at around $90 from a high of around $147 in late July, is giving a sigh of relief in the midst of financial turmoil. The major U.S. stock indices ended up lower on Friday when markets closed for the week. The benchmark, Dow Jones Industrial Average (DJIA) closed at 10325.40, down by 157.47 points. Nasdaq was down by 29.33 points at 1947.39 and the S&P 500 by 15.05 points at 1099.23. However, the European markets were up as French CAC 40 closed up by 117.47 points and the German DAX by 136.40 points on hopes that the European Union will find some solution to its sub-prime (real estate) crisis affected financial institutions and banks. Britain’s FTSE was also up by around 49 points on the last day of trading.

Asian markets were in disarray. Japan’s Nikkei lost around 216 points to close at 10938 and Hong Kong’s Hang Seng lost a huge 528 points at 17852. In the domestic stock markets, the Bombay Stock Exchange (BSE) 30-share sensitive index (Sensex) closed at 12526.32 with a loss of 529.35 points and the broader index, National Stock Exchange’s 50-share Nifty closed down by 132.45 points at 3818.30. To be precise, the ‘far modern’ ICICI Bank shares were under pressure in the domestic market.

At last the central bank has to come out to rescue ICICI Bank, by issuing a statement that there is no liquidity problem for the bank. Lack of confidence, usually, would add turmoil in the market place. A note from Standard & Poor’s, a leading global credit rating agency, stated that September was the worst month for emerging markets since August 1998.

All 52 markets were down for the month, resulting in a $4.1 trillion loss in equity during September, a $5.8 trillion loss for the third quarter, and a $10.5 trillion year-to-date loss, said Howard Silverblatt, Senior Index Analyst at Standard & Poor’s. For September, emerging markets lost 18.76 per cent while developed markets fell 14.80 per cent. But the U.S. continued to perform better than other markets with a loss of 9.29 per cent during the month. The Philippines was the only market closed up during the third quarter (0.04 per cent).

Emerging markets fell 27.98 per cent and developed markets lost 21.62 per cent during the third quarter. The U.S. was down 8.85 per cent while Russia was off 45.52 per cent. Year-to-date, all 26 developed markets lost ground while 25 of the 26 emerging markets fell; Jordan is the only country which posted gains for the year, returning 0.96 per cent.

For India, Prime Minister’s reported assurance that reforms in India would be carried out with a human face is giving a major relief for the markets:

“We have been cautious reformers.....reforms with a human face. We do not have a strong ideological commitment to the markets, markets are useful servants but markets also need regulations, purposeful regulations.... we still don’t have a full blown capital convertibility, so whatever we have done has been done with the long term interest of the country in mind, and at the same time we have sought to ensure that the risks in the process of opening up are controlled.” Even though it is unlikely that the stock markets would rebound immediately, as the U.S. Congress has passed the Troubled Asset Relief Program (TARP), shoring up confidence among market participants and investors are a major task for central bankers and governments across the world.

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