The Hindu : Indian stocks aligning with global markets

Online edition of India's National Newspaper
Sunday, Mar 23, 2003

Business

Business

Indian stocks aligning with global markets

By Oommen A. Ninan

MUMBAI MARCH 22. The stock markets seem to have reacted well to the beginning of the U.S. attack on Iraq hoping that this will end soon and the uncertainty on oil prices will be over. Institutional interest, especially from foreign institutional investors, has been reasonably good as reflected in foreign investment inflows reported by the Securities and Exchange Board of India (SEBI).

"I expect the market to continue to be steady but the risk of volatility remains high in case there is retaliatory terrorist attack in the U.S. or any of the members of the allies. We hope that the attacks will end soon without too much terrorist activity and the focus will shift to fundamentals," said a top executive of a leading foreign institutional investor. According to him the good news is that India is looking attractive from a regional perspective and reducing geo-political risks could translate into a handsome upside for the Indian markets.

The benchmark Bombay Stock Exchange 30-share sensitive index moved up by 110.49 points to 3218.73 during the week ended March 22 from 3108.24 in the previous week-end. On the National Stock Exchange, the S&P CNX Nifty gained by 37.50 points to 1037.15 from 999.65. The two markets functioned on Saturday as live trading took place from its back-up site in Chennai.

"The markets look good given the way the war may get over sooner. So, the uncertainty also would be over. International markets are also moving on this presumption and the FIIs continue to remain buyers," said Imran Contractor, Research Head, Stratcap Securities.

The FIIs were the major buyers on Indian bourses after the break-out of war in Iraq. The market was optimistic on the assumption that a quick and successful war waged by the allies would herald the end of a prolonged uncertainty in the global economic and financial scenario.

An important aspect of globalisation over the past decade is the increasing alignment of Indian stock markets with the rest of the world. Substantial amount of foreign institutional investment has entered Indian markets and the correlation of the Indian stock indices with important foreign indices has risen considerably.

The role of the international investor has steadily grown in importance in Indian markets.

An empirical analysis conducted by the rating agency ICRA on market reaction to the addition of stocks to a widely followed international index — the MSCI India Standard Index — reveals that such additions are associated with a significant and permanent rise upon announcement of the addition with no corresponding rise in volumes traded in those stocks. It appears that the `information effect' — the view that membership in a major stock index signals positive information about the company in question — is most likely to be the driver behind this `announcement effect'.

However, given that the possibility of a significant `liquidity effect' cannot be ruled out, the `information set' being referred to should be thought of as including information about future liquidity.

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