Before this question can be answered it would be interesting to look into the fact as to why and how did the Indian BSE hit the 20,000 points mark so fast after stooping as low as 7000 during year end 2008. In that period Indian stock markets which were cruising in January ’08 around higher 20,000 came crashing down by end of December. It will be interesting to see why such a dip took place. Was it due to the fall of Lehman Brothers? Was it the credit crunch? Was it due to falling investor sentiments? Lehman Brothers which outstood the period of Great Depression during 1930’s in States fell in 2008 due to subprime crisis. So does this mean the subprime crisis effect was an even worse scenario than the Great Depression? Well, according to me, subprime crisis was even worse but the similarities between the scenarios are noteworthy1.
The key to understanding as to why the Indian markets are falling now will be realised if the period after the market crash in end 2008 is studied. During the period of 2009 the Indian government in accordance with the rest of the world decided to introduce stimulus package into the economy and reduced the key rates like repo and reverse repo rates. The package for India was more effective than the west due to a simple reason. Indian markets had much lesser exposure to the debt laden high risk mortgage like the west. Therefore, the recovery for the Indian markets was much faster pace than the west. The time lag related to policy implication got narrowed as well as the stimulus directly got transferred into the economy within 2 months of introduction. As it is well known that when there is an introduction of the stimulus package it gets translated into the autonomous component of the IS curve causing it to shift right and leading to an overall output increase. Now, if the IS curve is shifting it leads to higher interest rates which leads to a huge capital inflow. This is exactly what happened for India, huge amounts of FII’s came into the Indian stock markets.
This was primarily due to high investors’ confidence in Indian economy which was due to multiple reasons. Firstly, Indian growth rate continued to be robust at almost 8% during that period. Secondly, unlike the West, Indian domestic market was very sound with the PSU’s showing exceptional potential. Thirdly, the political condition was sound in the country as well. Huge amounts of money came into the market. The growth actually became so robust that due to inflationary pressures, the RBI had to intervene sooner than expected, as early as Jan 2010. The RBI actually said their focus had shifted from providing further recovery to containing the recovery.
Over the period of 2 years as large as 27 billion USD flowed into Indian markets through FII’s. Actually though everyone might think this is excellent news but this is not entirely true. It is not good for an economy in the long run if no control can be kept on the capital inflows into the economy. If by some reason along with robust capital inflows there is positive current account then the economy tend to get heated up too fast. Another reason is the huge capital inflows generally gets translated into the asset markets which could lead to asset bubble. But the most important problem is the stock exchange might not be showing a true picture i.e. to say as the shares gets bought the prices starts rising and the SENSEX sees green while the reality is all the money is invested by foreign investors.
The problem with this is as the money is drawn out, the market would go BOOM! This is exactly what the case is now!
Due to rising inflation in the country, scams one after the other is giving investors the jitters leaving them with no choice but to withdraw? The thing is as the inflation continues to rise the real interest rates continues to fall. So, investors fear lesser returns. Thus, when only 2.2 billion of the 27 billion FII’s gets drawn out over the period of two months the market falls from 20,000 to 17,000 points. So, only an 8% withdrawal of their money by the foreign investors has led the SENSEX to fall by almost 3000 points. Are you thinking what I am thinking? IMAGINE WITHDRAWL OF UPTO 10 BILLION MORE! BOOOOM!!! There goes SENSEX RED and bleeding.
Well, on the other hand, the scenario might not be so dramatic. Even though food inflation in the country is on a rampage, core inflation level is still stable. The only problem is with the scams that are taking place. But that is not much of a worry for the investors. The growth rate predictions which have been revised to show more than expected growth may draw investors back. The consumer demand in the country remains still very strong and if FII’s goes out there are still possibilities of large numbers of FDI’s to take place via mergers and acquisitions. The fact is as the Western Economy starts to recover the foreign investors want to place their funds in their local markets than abroad as the risks get much lowered with moderate returns. There seems chances are quite low of such huge amount of withdrawals taking place in the economy as the confidence of the investors still remain intact on Indian future. The deal between BP and Reliance shows the kind of potential that still exists in Indian markets. A 9.2 billion dollars deal by the petroleum giants is sure to give a boost and increase investor confidence in India. The deal clearly shows the opportunities that exist in the energy sector of the country. Hence, experts are only saying that the SENSEX is going through a rally and will recover very soon. If you are a rational investor then that is in fact great news for you!
So, you know what to do! Go there and START INVESTING
No comments:
Post a Comment