Financial Scene C.R.L. Narasimhan

Lessons from Black Monday

Mumbai: An LCD screen at the facade of Bombay Stock Exchange displaying the stock prices in Mumbai on Thursday. BSE Sensex today dipped by 250 points. PTI Photo (PTI11_18_2010_000006A)

Mumbai: An LCD screen at the facade of Bombay Stock Exchange displaying the stock prices in Mumbai on Thursday. BSE Sensex today dipped by 250 points. PTI Photo (PTI11_18_2010_000006A)

The sheer size of the stock market’s fall last Monday (August 24) has naturally figured topmost in the list of worries of investors as well as that of the Government. In its biggest fall in six and a half years, the Sensex plunged over 1,600 points losing six per cent of its value in one day.

Catastrophic fall in benchmark indices — even more than spectacular rises — make for good headlines but need to be placed in their proper context for them to be useful. The markets recovered somewhat in the next few days.

Stock market wealth creation in other words cannot be so ephemeral. This is certainly not to suggest that extreme market volatility, which is really the problem, can be blithely ignored.

Nor the fact that India, along with other emerging markets, will have to face the consequences of globalisation. If anything as Black Monday demonstrates, outside factors — this time flowing from China — are becoming more influential than ever before. Importantly, there are very few policy options to check them.

Although the markets have bounced back since to recoup at least part of the losses, the mayhem in the wake of Black Monday is unlikely to be forgotten for a long time. Statisticians are quick to measure Monday’s fall with previous records. There have been other big declines as well. For instance, on January 21, 2008, the Sensex lost more than 1,400 points.

Although directly caused by the turmoil in China — the Shanghai Composite went down by 8.3 per cent — Indian benchmark indices fell more than those of some other emerging markets. Because of its close proximity, Hong Kong was logically expected to fare worse than India and other emerging markets. But in percentage terms the Hang Seng, though on the downside, fared better than the Sensex.

Volatility in stock markets has inevitably had its impact on the rupee’s external value. China’s moves to depreciate yuan has caught several central banks off-guard. With China’s motives still not clear, the RBI and other central banks have had to support their currencies, both by conventional means as well as talking up. In India, both the Finance Minister and the RBI Governor have reassured investors. The Finance Minister expects the Indian markets to settle down soon while Dr. Rajan has pointed out that the size of the exchange reserves is such that rupee volatility can be contained.

The fact that India’s macroeconomic fundamentals are in much better shape than at any time recently, should be hammered home. Cheaper oil has certainly helped. India’s GDP growth should be on an even keel.

Other indicators point to an economy on the mend. The current account deficit is pegged at a healthy 1.3 per cent of the GDP. Exchange reserves are at 8 to 9 months of imports.

Prices of other important commodities such as coal are still falling. So, at least in dollar terms the import bill should not go up. However, on the exports front, the picture is hardly flattering. Aggregate merchandise exports have fallen for eight months in a row, a clear sign of demand compression in major trading partners.

A weaker rupee should help in improving competitiveness but then currencies of India’s major competitors too have fallen.

The rupee is on a managed float with the target range not announced. A cheaper rupee can pose problems for the large number of companies who have kept a portion of their external commercial borrowings un-hedged. This has been a major problem even before the current turmoil, which will naturally exacerbate the problems.

Indian equities, already under pressure, will face further selling pressures as fund managers shift portfolios away from perceived risks that the country represents. The government’s ambitious disinvestment target of Rs.69,500 crore looks unachievable if present trends continue. Indeed, the share sale of Indian Oil, a blue chip fared badly, just scraping through.

Obviously a lot depends on how China’s policy makers manage to cushion what would otherwise be a hard landing of the world’s second largest economy.

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Printable version | Sep 25, 2022 5:51:34 pm |