Opinion - Editorials   

In the grip of pessimism

Reacting to a variety of bad news from India and abroad, Indian stocks plunged sharply on Monday. The benchmark indices, the Sensex and the Nifty, were lower by 3.25 per cent and 2.74 per cent respectively on Monday evening compared to their closings the previous week. More ominously, both the indices dropped below the psychologically important marks of 15,000 and 4,500 during intra-day trading, although they closed above those levels. On Tuesday, after some sharp swings, the indices dipped even lower amidst a sense of deep pessimism that seems to have engulfed a majority of institutional participants, both Indian and foreign. Their behaviour suggests that the market has not yet hit the bottom, at least in this phase, and further declines in the stock prices and indices are entirely possible. The economy is slowing down. Inflation will remain a major worry in the days to come. Already well above 8 per cent, it will possibly touch double digits when the impact of the recent fuel price hikes is factored in. The fiscal position is likely to worsen before it gets better. There is little possibility of interest rates coming down. Corporate results for the first quarter are widely expected to be far less impressive than they have been in the last two years.

Nearly all these factors are well known and the recent weakness in the stock market has resulted from that perception. The trigger for the latest sharp fall has come from abroad. Oil prices, already high, went up by an unprecedented $10 a barrel in a single session on Friday, June 6. The strong connection between the global financial and commodity markets was once again in evidence. Petroleum prices shot up as the dollar came under intense pressure in the currency markets. There are genuine fears that the United States economy might still trip into a recession, a possibility that was thought to be receding a few weeks ago. India and other emerging markets that were already struggling to cope with a U.S. slowdown will now have to face the possibility of large outflows as foreign investors seek the safety of developed markets and debt instruments. In India foreign investors have already sold equities worth $4.55 billion during this year. It is highly unlikely that they will return soon. Stock market valuations may be maintained at reasonable levels only if domestic institutions such as the LIC and the cash-rich mutual funds move in to fill the void. Given that many blue chips are available at their 52-week lows, it may not be a bad business strategy either.

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

In the grip of pessimism
GM concerns in agriculture
War for the soul of Islam in India
The politics of polio
Corrections and clarifications
Gujjar talks
Tackling price rise
Madani’s plea
Postal deposits
‘ANC has not moved away from people’

Copyright © 2008, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu