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Calming the markets

Stock markets in India and in many other countries continue to exhibit enormous volatility. The contagion originating from the U.S. credit markets has spread across the globe, inflicting major damage on the financial markets of most countries. In India on Friday the Sensex closed some 1200 points down from its peak levels of 15,600-plus. Volatility continues to be a major worry, as much as the steep fall in market valuations. No one can be sure whether the markets will sta bilise even at the lower levels. A major reason is that, so far, it has not been possible even in the closely linked developed markets to estimate, with a reasonable degree of accuracy, how much damage the U.S. sub-prime mortgage crisis has caused. True, periodic spikes in global oil prices tend to dampen the stock market sentiment and the Asian currency crisis of the late 1990s left its mark. But the consequences of the crisis in the U.S. credit markets are more difficult to fathom.

As a consequence of globalisation, the stock markets, in particular, depend as much on global cues as on domestic developments. It is likely that the dominant foreign institutional investors, having sold Indian stocks in the early days of the crisis, are still waiting in the wings. Many of them, including some hedge funds active in India, are reportedly holding worthless securities that were fashioned out of risky loans. Redemption pressures have forced some of them to liquidate quality stocks in their portfolio. There is much that India can learn from the crisis by way of anticipating and preparing for the impact of global developments in a closely integrated financial world. The measured regulatory responses to globalisation — as for instance in the timetable for full convertibility of the rupee — have stood the country in good stead and, as the recent developments show, are the most appropriate in times of global financial crises.

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