In India: Bears and Bulls in the Stock Market
January 30, 2008
Finally the US sub-prime crisis caught up with the Indian stock market. The massive fall in the Sensex (Bombay Stock Exchange) last week, and equally rapid rise the very next, sent shock waves leading the regulator to close down the market. The ripple effect of the sub-prime crisis which has taken the toll of major global investors was bound to hit the Indian stock exchange with 1200 foreign financial investors invested to the extent of over US$ 70 billion in a market size of US$ 450-500 billion. It is estimated of this nearly US$ 250 billion was in the Promissory Notes which were bound to be called when the market dipped.
Although the Sensex has recovered sufficiently to reach 18361.66, close to the high of over 21000, it is still greatly volatile. The fundamentals of the Indian economy, expected to grow at 8.5% over the next 2-3 years, are sound, yet the market is characterized by structural deficiencies. The most important is the nagging fear of foreign financial investors pulling out at the slightest hint of a fall due to an adverse market development. This needs to be balanced by an increase in institutional players, like pension funds, to provide sufficient depth. Secondly, in spite of sufficient liquidity in the market, avenues to move cash on time from one part of the financial system to the other are limited, creating a temporary mismatch and enhancing risk. The market also needs a robust security lending and short-selling infrastructure.
On the whole, the market will continue to be buoyant, yet there needs to be a better performance on over-all trade. Current foreign exchange reserves are estimated at US$ 280 billion, but will need to be deflated for rupee appreciation of 11% over the last year. An increase in recoverables from trade, remittances, software export revenues and invisibles is essential to maintain the upward tempo.
The sudden and vertiginous fall of the Sensex last week holds a lesson for the financial regulator: the increasing susceptibility of the market to developments outside India. It also raises doubts on whether the government should succumb to the growing clamour for making Rupee fully convertible.
Ambassador Rajendra Abhyankar was the Indian Secretary of External Affairs from 2001-2004 and has served as the Indian Ambassador to the EU, Belgium and Luxemburg, Azerbaijan, Turkey, Syria, and Cyprus. He was also the Consul General of India in San Francisco, California. He currently serves as The Asia Foundation’s Program Development Consultant in India.
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