Closure of the financial market would have a negative impact on foreign institutional investors and this would erode their confidence and impact investment in the aftermath of the coronavirus crisis.
- Shailendra Kumar Rai
The coronavirus crisis has created tremendous volatility in the financial markets. Circuit breakers and halt in trading have been observed in the past few weeks. During the last few weeks, both BSE Sensex tumbled by over 33% (from 41,170 on Feb 20, 2020, to 27,590 on April 3, 2020) and has eroded crores of rupees of the investors’ value. The fact that the country is under complete lockdown and may go for a staggered exit is likely to further accentuate the volatility in the markets. There is an urgent need to find ways to avoid the unprecedented social and economic disruption created by coronavirus. It is with this in mind, some people have been calling for financial markets’ closure for short-time. The closing down of financial markets has its pros and cons.
The cons of closure are the following:
1. All financial markets are globally connected and all have witnessed massive erosion of wealth. Closure of the financial market would have a negative impact on foreign institutional investors and this would erode their confidence and impact investment in the aftermath of the coronavirus crisis.
2. Momentary close down to trading gives market participants time to resolve information which in turn helps them to make more rational decisions, however, a closure could cause real harm to investments in the long run as they will be viewed less favorably by global investors.
3. Closure of financial markets may also affect the ability of India Inc to support its operational activities and also restructure at the time of crisis. This is because the markets connect people who have excess funds to those who need additional money. The financial markets are also crucial for economic growth. The financial system is important in reallocating capital and thus providing the basis for the continuous restructuring of the economy, which is needed to support growth.
4. Investors may panic if they don’t have access to their assets. This will put pressure on the government, given that people would expect the government to guarantee the value of existing stationary assets. This, in turn, could complicate matters for the government, which is already struggling to minimize the social disruption created by coronavirus.
5. Closure of markets would affect the industries that are critical in times of crisis such as pharmaceuticals, foods, services, etc. The absence of well-functioning financial markets would lead to an increase in the price of essential goods and services due to black marketing.
1. Today, the financial horror of the type we are observing now comes from uncertainty and panic that the volatility may slow, or even stop. Moreover, with so many people working from home, many market participants do not have the tools they need to invest and trade appropriately. Thus, everyone does not have equal opportunities to trade and few may take advantage and misuse the situation for their personal benefit. This will defeat the very purpose of the functioning of financial markets.
2. The government also should focus more on public health rather than on fiscal measures to stabilize markets. The fiscal response should be secondary. The government should also increase social welfare spending. These steps would be a positive signal to investors and will also help the markets to stabilize once open after the closure.
To sum up, it is urgent that the government intervenes and take appropriate measure for the stability of financial markets and create investors confidence in the economy. Moreover, it is also essential that India Inc corporations join hands in creating confidence among citizens by investing in essential services in the wake of dangers caused by coronavirus. The demand made by India Inc from the government can wait for the time being in order to ensure the revival of certainty and confidence.
Shailendra Kumar Rai is Chairperson of International Relations, Faculty, Accounting & Finance at the MDI (Management Development Institute) Gurugram. Views expressed are the author’s personal.