Sucheta Dalal :Ayodhya holds the key to Sensex (3 March 2002)
Sucheta Dalal

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Ayodhya holds the key to Sensex (3 March 2002)  

If the 144-point drop in the Sensex following Yashwant Sinha’s downbeat Budget was an overreaction, then the 116-point rally on Friday was equally a case of premature exuberance or maybe worse. The finance minister should not allow himself to believe that the market is re-rating his Budget on the day after. It is only airtime experts who reacted to the rally with a mid-course correction in their views about how bad the Budget was. It is in fact too early to tell which way the market would move in the coming weeks.

Let us look instead at a few facts. As far as one can say, businessmen remain glum and the middle class continues to be angry with the Budget. So what explains the sharp swing in prices, in the midst of extreme political uncertainty and violent rioting? Quite simply, it could be plain old market manipulation. Let us not forget that major business announcements by corporate houses have often been preceded by huge market manipulation.

Let us look at some numbers. On February 28, when the Sensex slumped 144 points the turnover on the BSE was Rs 1,924 crore; on March 1, when it shot up 116 points it was significantly lower at Rs 1,206 crore due to the nationwide bandh. The situation on the NSE was no different. Turnover on Budget day was Rs 3,615 crore while on March 1, it was down to Rs 2,441 crore. This indicates that the steep rise in stock prices happened on relatively lower volumes, which may have made it easier for operators to influence price movement.

Let us look at other indicators that would influence stock prices in the coming weeks. For starters, the economic outlook was brighter in the run-up to the Budget. The BSE Sensex had gained a hefty 1,000 points in the last five months. A lot of the buying had reported come from FIIs who had pumped over Rs 2,000 crore into Indian stocks the first two months this year. The FIIs, we were told, were buying at low valuations in anticipation of a global economic turnaround.

In fact, there was indeed plenty of good news trickling in. Inflation at a never-before low and consumption was showing signs of a recovery. Sales of cars, motorcycles and scooters were picking up.

Even the beleaguered steel industry was starting to report an improvement in demand. Real estate industry sources said that they had begun to receive inquiries for business premises. And hotels were seeing an improvement in occupancy rates. Naturally, the market expected the finance minister to take advantage of these early signs of a recovery by announcing a Budget that promoted growth and consumption. But Sinha did nothing of that sort.

These expectations of an industry-friendly Budget probably left several large operators stuck with huge long positions when prices collapsed. FIIs sold negligible amounts on Budget day, which only shows the extent of disappointment with the Budget. Were the big operators talking the market up in order to create an exit for themselves?

Well, television networks certainly saw a lot of unexplained bullishness after trading hours on budget day. Many investment analysts openly allege a manipulation of market sentiment. They say, it would need nothing short of a dream Budget for genuine investors to completely discount the violence and the uncertainly about Ayodhya as well as the BJP’s reverses in the recent Assembly elections and produce a 116-point rally.

It is also a fact that notwithstanding the scam of 2000-01 and the setting up of a JPC to investigate it, market manipulation remains just as easy as before. Hasn’t a leading business house shown us how prices can be manipulated with impunity before announcing important corporate decisions?

The Ketan Parekh-led scam has also demolished another myth. That so-called FII investment in India represents reputed foreign institutional investors, who make prudent decisions based on research and analysis. Investigations by the capital market watchdog, after the 2000 collapse, show that large chunks of FII investment was nothing but Indian speculative funds routed into the country through the tax havens abroad. Since the government is making no effort to plug the route, or to trace the beneficial owners of various FII sub-accounts and OCBs, the potential for misuse remains wide open.

FII investment numbers from 1994 onwards provide some interesting insights. From January 1994 to December 31, 2001, FIIs invested a whopping Rs 52,241 crore in the Indian market. In all the years since then, FII investment was negative only in 1998—when India conducted its nuclear tests and this was followed by the South-East Asian crisis. Otherwise, they remained positive, no matter what the state of the economy or the markets. In the same period the BSE sensex has moved from 3,437 in January 1994, to 3,262 on December 31, 2001.

Even if one were to make allowances for changes in the composition of the Sensex, it would really mean that FIIs have collectively made very little money in the Indian markets. This suggests that the continued buying by FIIs ought not to be the guide for retail investors to turn bullish in an uncertain situation. Only the next few weeks will show whether the early signs of recovery translate into demand growth despite a lacklustre Budget. Above all the immediate fate of the market will depend on the government’s ability to control the political situation.


-- Sucheta Dalal