The volatility in the markets was less on Tuesday and everyone in government has congratulated himself?on whatever. There have been serious comments in the media about global volatility, impact of the dollar, rising US interest rates, markets falling in several countries, as the reasons for all this. There have also been counter articles saying that there is net inflow of funds and, therefore, in a manner of speaking, we are seeing only squaring off of positions. There have been some articles in this newspaper group blaming it on the reservation policy?it would be surprising if many of the FIIs have even a clue on the fineprint of that. Good stories, and happy reporting and viewing.
It is interesting that for those using technicals for market projection, the Gann/Bowden methodologies, as well as some others, have been predicting this fall for some time and have also given some future dates as well. These methodologies have also predicted, reasonably well, the highs that have occurred in the past. Adherents of these will now claim they knew it all along, and that the volatility is not over yet.
Perhaps it is a good time to step back and look at some of the infirmities. There is a strong emotional quotient in institutional decision-making, as those in control panic over sentiments. Banks, that were happy with unbelievable overdraft limits, suddenly got into the act, extracting higher margins from individuals and brokers. The Sebi algorithm triggered sudden increases in brokers? margins. The finance minister?s call for staying invested appeared quite plaintive. The lone sane voice was of the RBI, that decided to provide liquidity to brokers. People were in a hurry to get out, as though they never believed in the good times story after all. They couldn?t believe the CBDT would issue a circular totally oblivious of its impact on the market, and without the finance ministry?s knowledge. There is an unparalleled level of anxiety to living and doing business in this country, a feeling of the sky falling at any time (like Vitalstatistix, the comic Gaul chief!).
The reasons for the negative reactions, for the local investor, are not hard to find. There is a concern about transparency and fair dealing from the regulators. The Sebi order against market participants who account for nearly 60% of market participants, issued ex parte, the sudden reversal of that order in respect of one, and the contradictory statements from Sebi since that day, have all added to the confusion. It is interesting that only a very few orders of Sebi have survived in appeal. The ability of the regulator to monitor the market and to apply correctives needs to improve.
For the FIIs, the continued tug of war between the regulator and RBI on participatory notes has been a source of anxiety. Even the finance ministry report did not offer any clear solutions and there is a worry that the axe would fall one day, the where and when being uncertain.
• Both global and domestic factors indicate the market correction will stay • This should reveal economy?s strengths, gaps; sentiment can?t be the sole driver • Adhocism in market regulation must be eliminated, as it distorts & causes panic |
There are other genuine worries as well. Infrastructure progress has slowed. There is an also a significant slowing in the growth of corporate profits. The promised reforms agenda, including insurance, pensions and retail, are still to materialise. There is little progress on the ground on the government?s Common Minimum Programme. Certain policies, including the one on the SEZs, have not been well thought out, and have been hijacked by vested interests. The investors are certainly aware of all this and that the 12,000 level Sensex was a bonanza to be encashed at the earliest.
It is likely the correction will remain. There are obviously international reasons for this as well. The softening of consumer demand in the US, the slowing of housing prices, all point to a consumer reluctance that, combined with high interest rates, will feed its way into all global markets. Internally, uncertainties over the reactions of the regulator and the government, as well as institutions that inter- vene in the market, will ensure the sentiments are careful. All FIIs have been cautionary on India for some weeks now, with the prognosis that equities are overpriced and it is time to move elsewhere?that prediction will remain. That is not to say that there will not be renewed activity, but it is likely the market would find equilibrium at some lower levels.
It may be a good thing, after all. First, it would again highlight the need to perform and not be guided by sentiments alone. This would be true for the private sector, in reviewing investment plans, and even more so for the government, for it would now need to deliver much more than it have done in the two years past. Second, it would have some effect on asset prices that have gone through the roof in the past year. Third, it would constrain liquidity, especially in the margins allowed to individuals and brokers. Finally, it would exhibit the fundamental strengths in the economy, in that it would separate performing sectors from non-performing ones and thus focus attention on the needs for improvement?no longer can achievements of the government be the increase in the Sensex alone.
It is also important that the need to intervene and correct in an ad hoc manner be curbed. Markets will go up and down and so long as there are well thought, market-friendly policies, market prices will reflect true value. Interventions distort, and interventions that do not appear to be reasoned out cause panic. It may be just the right time to get regulation in order and firmly in place, and allow the market to dictate prices and returns.
?The writer is a former finance secretary and economic advisor to the PM
