The unwinding by Tuesday of Monday?s rally of 571 points at the BSE highlights a fundamental problem that?s going unnoticed in all the analysis of stock markets. It seems almost as if markets can rise and fall on cues from excitability-prone business television. The disease behind this symptom is low trading volumes. During Monday?s rally, volumes in both cash and F&O segments at both BSE and NSE hit five-month lows. This low volume is why our stock market rallies cannot hold their breath for long. A better perspective of this problem is obtained if we step back from the immediate crisis and look at longer-term figures. Compared to last year, the total monthly turnover of equities at the BSE in September 2008 has dipped by 12%. The daily turnover of equities business in the market was Rs 6,156 crore in September 2007. In September this year, it was Rs 5,141 crore, a drop of almost 16.5%. On such a thin base, it is easy to see why the amount of business contracted once the financial crisis spread wider. October 2008?s daily turnover of Rs 3,697crore looks better only when compared with the trend in November so far?an even lower turnover of 3,690 crore. It is logical that the volume of shares traded has also gone down steeply in this period. BSE figures show that the monthly trading volume was Rs 1,001 crore in September 2007 and Rs 547 crore in September this year. The figures for October are a fifth of that?Rs 100 crore.
What does this suggest? Players are wary of trading in volatile markets and they have very few defensive stocks on which to build up positions. The other problem is the lack of an alternative to the foreign institutional investors to build up volumes. Notice that in earlier episodes like May 17, 2004 or again in October 2007, volumes quickly returned to the mean levels in the markets as FIIs did not withdraw. That level of security is gone. This could have been replaced if large investment agencies like LIC and the EPFO were present in strength in the markets. For instance, out of LIC?s total investment corpus of Rs 7 lakh crore by market cap, while about 50% is invested in equities, a huge percentage is never traded. The EPFO, with a corpus of over Rs 2 lakh crore, does not have any exposure to equities. Together, they are double the size of the investment portfolio of mutual funds. Indian stock markets are too thin and large domestic players need to come in.