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BW Businessworld

Dancing To Foreign Tunes

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Over the past 10 days, indian stockmarkets appear to have been hit by a ‘perfect storm', an expression used to describe the coincidence of different phenomena that aggravate conditions drastically, and taken from a book of the same name by Sebastian Junger. To begin with, there was the debt crisis in Ireland and the possible contagion effects through Europe that jolted the markets.

Besides, there was also news from the Central Statistical Organisation (CSO) about the weak index of  industrial production (IIP) numbers. Finally, the lid over the scandal surrounding the sale of 2G spectrum during telecom minister A. Raja's tenure blew off, leaving a swathe of damage behind, including Prime Minister Manmohan Singh's apparent inability to rein in rampant corruption.

The Bombay Stock Exchange's Sensitive Index (Sensex) has dropped like a stone from its all-time high on 5 November, losing nearly 7 per cent of its value, or 1420 points. Ireland accepted a bailout package from the European Union and the International Monetary Fund, but the respite was temporary. After the spectacular rise in market indices in the preceding six weeks, the sudden and drastic fall was a shock to the system, to say the least. But many market participants dismiss the fall as a technical correction. "The crash in the Indian market has been due to global events rather than domestic," says Nandan Chakraborty, managing director, institutional equity research, at Enam Securities in Mumbai. "Investors sold out on the back of a minor resurgence of growth in the US market, volatile crude oil prices (hovering at about $85 per barrel) and fresh concerns emerging over the debt crisis in the European Union." Nothing has changed domestically very much, say like-minded analysts.

Perhaps it is natural that after their spectacular performance, Indian markets would react negatively to such news. Despite this sharp correction, the Sensex is still up by 12 per cent in the year so far. "After September's and October's rapid rise, the market is consolidating and going through a correction," says Alok Sama, founder and president at Baer Capital Partners. "Global factors can affect foreign institutional investors (FIIs) who own around 14-15 per cent of the Indian market. A change in currency or credit situation can result in withdrawal of these investments." 
In the meanwhile, capital continues to flow into Indian equities; despite the sharp fall in the market indices there has not been any major impact on the FII flows. Till 16 November, FII inflows into equity remained buoyant at $3.85 billion; for the year, FII flows are at a record high of $28.6 billion.
"Fund managers have had a good year and they are capitalising on it by booking profits ahead of the year-end," says a dealer from a foreign brokerage firm who wished to remain anonymous. "After all, they, too, want to take home a good bonus." Marketmen say that in the months of November and December, there is usually some selling; the market will bounce back in January-February once fresh allocations are made. "The Indian market just touched its previous high," says Sama. "The economy is growing at 8 per cent-plus. What it means is that the market is yet to achieve previous high valuations." 
Global economic growth, on the other hand, is not likely to be very robust. With so many countries focused on controlling their fiscal deficits, growth in the developed economies will barely be above 1 or 2 per cent. Investors can't stay away from growing economies and markets like India, analysts say. But then again, it is not certain that the weather will clear up soon. (This story was published in Businessworld Issue Dated 29-11-2010)

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magazine growth markets sensex bse iip mahesh nayak fiis equity foreign