Markets in free fall

North Block’s efforts come a cropper

The market paid little attention to the finance ministry’s ineffectual Sunday night moves to prop up the capital market and stock prices nose-dived. In the first couple of hours of trading the BSE Sensitive index breached a three-year low of 2740 touched in October 1998. The rupee sank to Rs 48.25 against the US dollar. The ensuing panic and volatility in the debt and gilt markets forced the Reserve Bank of India to open a special window to buy back government securities.
Part of the panic was also due to exaggerated media reports regarding the selling by foreign institutional investors. The Securities and Exchange Board of India announced on Monday that FII sales were only $8 mn, which is negligible when compared to their investment of $3 bn plus in the last seven months alone. The sale by lenders of collateral against shares was partly responsible for depressing the market, but the bigger problem is the absence of any hedging mechanism which would have allowed contrarian operators to buy stocks. Consequently, even blue chips plunged on very thin volumes.

While it is true that sentiment plays a big role in deciding stock prices, the finance ministry’s attempts to talk up the market came a cropper because they were largely meaningless. Margin trading would have helped if it were already in place today; similarly, the staggering of brokers’ turnover fees is a relief, but not a sentiment booster. As for the raising of FII holding in companies, it is pure waffle in a bear market. For instance, brokers point out that even blue chip shares are plummeting on very small volumes. Only the relaxation of creeping acquisitions would have helped, if old economy industrialists had the money to buy their shares. In the meanwhile, SEBI made hectic efforts to assess the situation by meeting brokers, stock exchange chiefs, FIIs and mutual funds. Hopefully, SEBI will conclude that the only real sentiment booster would be genuine purchases or economic measures. One suggestion is that banks which are flush with deposits should buy the top 50 index stocks.
This could act as a sentiment booster yet give banks a good chance of making money on future capital appreciation. But it is still unclear whether policy measures or patriotic buying can change the course of stock indices.