Did this volatility signal a period of uncertainty among the big investors, or a period of simple periodic market correction Opinion from some leading foreign investment houses is not encouraging. A recent report by Credit Lyonnais Securities attributes the 8% correction in the Sensex to global factors, but warns that US developments such as inflation concerns, increasing risk aversion and expectation of a rise in interest rates could impact foreign investment in India.
Domestic worries over reception to Vat and growing cost pressure on input prices are added concerns. It set investors worrying: soon after, Goldman Sachs triggered worldwide hysteria with its claim that crude oil prices could touch a mind-boggling $105. It said oil markets may have entered the early stages of a super spike perioda multi-year trading band of oil prices high enough to meaningfully reduce energy consumption, and recreate a spare capacity cushion, only after which will lower energy prices return.
There are many views and much scepticism about the prediction. A reputed international e-letter says, It is well known that Goldman has significant energy derivatives holdings and that may be the motivation of this story, and account for the timing of it, as the oil prices were correcting a bit.
Many observers feel recent growth hasnt been investment-driven
FII investment is volatile and any slowdown suffices for a panicky decline
This gives a lie to Indias frequent claim that its rich entrepreneurial talent is able to rise above policy considerations. Morgan Stanley says global investment interest can only be sustained if there is strong policy action to reduce fiscal deficit, increase infrastructure funding and accelerate growth. It analyses that recent growth has been driven by leveraged consumption and augmented by capital inflows, rather than investment. Thus, when liquidity shrinks and rates rise, growth could falter. It also warns investors not to assume corporate earnings will remain high and a slowing in dividend payouts could affect market sentiment. It also worries that FIIs are the biggest players in the Indian market and domestic investors are almost non-existent.
The contrasting trends among various momentum indicators imply market volatility is set to increase, says the report. Strikingly evident in FII investment trends through March. First, net FII investment in the Indian market, which was anywhere from Rs 350 to Rs 500 crore every day in 2005, barring spikes due to IPO subscription, declined significantly in the last fortnight. A mere slowdown in FII investment, leave alone a net sale, is enough to send Indian stocks into a panicky decline. FII investment data also shows constant churning of stocks by foreign investors, to run up gross daily sales and purchases in the region of Rs 1,000 crore. These mysterious sales and purchases cover the activities of several shadowy hedge funds, whose origin and investor composition is not even known to Indian regulators. Hedge funds are notorious for their swift market action and thrive on creating serious market volatility.
Are we prepared for the consequences of such volatility and can we deal with a significant pullout of FII investment, in line with global economic changes The answer is no. Having ignored the need to build a retail investors base, by restoring investor confidence, lowering entry costs and improving market safety, we have little option but to watch events and face the consequences.