Sucheta Dalal :Market musings in these volatile times
Sucheta Dalal

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Market musings in these volatile times  

Jun 19, 2006

After the roller-coaster ride in the capital market last week, only the very bold or extremely foolish would dare to predict what the coming week will bring. In the last fortnight, the Indian market has bounced up three times with a dazzling momentum that is just as worrying as the deadly downslide.


Such was the ferocious upsurge in stock prices that it has left investors confused. Has the market bottomed out? Or is this what the Americans call a ‘dead cat bounce’. Does the Indian economic and political situation matter at all, or are our markets so globalized that we follow international trends irrespective of domestic developments? On all three days when prices surged last fortnight, it was in tune with a bounce back in world markets.


Here are a string of little developments and factoids that do not gel with the view that global capital flows are the only determinant of price movements.


Global markets were indeed up last Thursday and Friday, but did the irrational rally in India have nothing to do with bankers demanding additional cash margins from over-leveraged brokers? Only a ferocious 1000 points-in-two-days kind of bounce back would have quietened their demands.


The Finance Minister has fewer comments about the market, but banks and public sector insurers are reportedly being prodded to support prices and many are happy to oblige. This is better than destroying one public sector mutual fund by forcing it to provide an exit to scamsters, but is no less worrisome.


The grapevine says that the Finance Ministry gets its market input from a public sector fund and a private sector one. The latter is disconcerting, because market sources say that the fund manager there is busy covering up large speculative losses.


An interesting feature of the savage correction since May, which dragged the Sensex down from over 12,000 to under 9,000, is the silence of investors who suffered hefty losses. There is a lot of pain and bloodshed in the market, but no wailing in public. Investors worry that an open lament will lead to further declines and bigger losses. There were hushed whispers about a female employee of large operator having committed suicide after suffering hefty personal losses by trying to mirror her boss’s portfolio. But nobody is talking about it.


This reflects a new maturity among investors and a realisation that they have to take responsibility for bad times and good times. But that is not what the government is signalling. No significant economic reform has been announced even after the West Bengal elections, yet the Left Parties are getting more belligerent everyday. As if the political gamesmanship in announcing reservations for Other Backward Classes in institutes of higher education were not enough, the Health Minister’s confrontation with the Director of the All India Institute of Medical Sciences smacks of arrogant interference.


At another level, the Finance Ministry seems out of sync with the Reserve Bank of India on interest rates and other issues. Bankers are confused and don’t know who to believe. Consequently there is little clarity on interest rate trends, even while the impact of higher oil, food grains and real estate prices on inflation and on economic growth is still to kick in.


The Finance Ministry is only adding to peoples’ worries with daily media leaks about plans to increase services taxes to 20% and expand their reach to several new sectors. Nobody knows whether these are just trial balloons, but will someone ever ask the tax authorities to demonstrate that their policies have actually led to an increase in the taxable base and is not merely extorting more revenue from the same milch cows?


The use of tax authorities as a tool of harassment is another development. Despite the protestations of sundry Congress Party spokespersons, there is a public consensus that filmstar Amitabh Bachchan and his wife Jaya are being harassed and humiliated because of their personal falling out with the Gandhi family. There was even a specious argument that India is not alone in harassing celebrities for taxes.


It is a sad reflection on the government when supporters of newly-elected MP Rahul Bajaj worry that he may be harassed for being elected through the support of a clutch of opposition parties. Especially since the Bajaj group has been open about ‘‘donating to the Congress Party by cheque’’ for decades.


If celebrities feel pressured then what will happens to ordinary investors who have recently submitted their tax returns and are waiting for their assessment officers to decide if they are ‘investors or traders’? So far the Finance Minister has refused to acknowledge that his budget speech misled investors or to find a solution, but the letters in my mailbox indicate that investors are seriously worried.


Let us now move to a more narrow issue of capital market policy. On Friday, the Securities and Exchange Board of India (Sebi) announced that it plans to collect Value at Risk margins from brokers at least five times a day to curb volatility. This will force brokers to block up even more capital everyday; while it may not hurt well capitalised brokers too much, the move will drastically squeeze small brokers and drive a chunk of day traders out of the market.


Over time, it may even drive smaller brokers out of business since their business is bound to flow to well-capitalised brokers. Since the regulator has not bothered to explain the rationale behind its policy it is not clear if it is Sebi’s intention to ensure market safety and curb volatility by forcibly reducing liquidity.


Does all this add up to a secular, long term bull market? On the contrary, it suggests that even when the signals are all bullish, a bunch of politicians could disrupt economic development due to corrupt self interest or bad policy.


-- Sucheta Dalal