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Now For The Good Days?
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Having made my confession, I ask you to look carefully at the chart below, which plots the adjusted closing value of the BSE Sensex from 30 December 2011, the last trading day of the previous year, to 29 June 2012. As you can see, there are three distinct segments of the roller-coaster ride:
Phase A: From 30 December 2011 to 21 February 2012, when the Sensex climbed by 19.2 per cent, from 15455 to 18429 points.
Phase B: From 21 February 2012 to 1 June 2012, when the Sensex slumped 13.4 per cent to 15965.
Phase C: From 1 June 2012 up to 29 June 2012, where the Sensex has again started climbing, and has risen by 9.2 per cent to touch 17430 points.
My dumb questions are these: what is it that the punters saw in India and Indian stocks that led to the 19.2 per cent upswing in Phase A? And what is it that they are seeing now that is resulting in the making of another bull run?
There was nothing of note between 30 December 2011 and 21 February 2012 to nurture any bullishness. In the four quarters preceding January-March 2012, GDP growth had come down from 9.2 per cent to 8 per cent to 6.7 per cent and then 6.1 per cent. Wholesale price inflation was at around 7 per cent and tending to rise. The growth rate of the Index of Industrial Production was shrinking across almost all categories — with some sectors contracting in absolute terms. Oil prices were running at around $120 per barrel and taking the mickey out of the central government's oil and fertiliser subsidies. Any reasonable person would have known that the fiscal deficit was set to soar to stratospheric levels for the third consecutive year. There was no chance of the Reserve Bank of India being accommodative by reducing the repo and reverse repo rates. Most companies were showing lower growth of the top line; an inflated middle; and a fall in profit margins. And there was no economic or political governance worth the name.
That's what it was like during the period leading up to Phase A. Moreover, the story from the euro zone was getting from bad to worse. Yet, the punters and foreign institutional investors alike behaved as if India was ready for another stock market boom.
So, too, this time around, i.e., Phase C. What has happened in the last month to justify this spurt? That the second Greek election of 17 June 2012 did not lead to Alexis Tsipras of the Syriza party winning enough votes to form the government? Or that Pranab Mukherjee has been shunted upstairs and that Manmohan Singh has taken additional charge of the Ministry of Finance? Or a feeling that after a GDP growth of 5.3 per cent in January-March 2012, things cannot get any worse?
This looks like irrational exuberance. The euro zone remains is deep trouble. Greece still has to repay large debts, and is far from reformed. Germany refuses to budge an inch from the ‘cut your coat according to your cloth' hectoring that is the leitmotif of Chancellor Angela Merkel. Manmohan Singh and his chosen few may have returned to economic headlines, but have done little yet to create good-time feelings.
What has changed for the better? Has the RBI become more willing to cut rates? Are we seeing greater investment impetus, however small? Is inflation moving to a steady state of 5-6 per cent? Is there any clear sign of cutting the fiscal deficit? Who is saying, "Time's up. Now let's move it"? No one that I know of. So, why this spurt? To create another fall? I'm just a dumb economist. Stock prices are beyond my pale.
The author is chairman of CERG Advisory.
(This story was published in Businessworld Issue Dated 16-07-2012)