The question whether the stock market is an adequate barometer for gauging the direction and pace of growth and the strength of an economy is far from settled. Economic fundamentals such as the rate of GDP growth, inflation, and export performance are no doubt closely watched by the markets but they are, at best, just one set of factors that drive stock prices. In a globalised environment, markets around the world take cues from one another. It would be difficult to correlate market behaviour with specific economic or political developments, however significant they might be. Yet, as seen in India, stock markets do appear sensitive to scandals and react even within a relatively short-time frame. The Sensex, which rose above 21,000 in early November and has had a roller-coaster ride since then, is now hovering around 19,500. Its latest show of volatility is largely attributed to the profusion of scandals. The ongoing investigations into the telecom scandal, the alleged bribery involving certain public financial institutions, and a recent market ban on some company promoters for insider-trading have all depressed sentiment and contributed to a fall in market capitalisation.
An evidence of the depressed sentiment was seen in the 454-point drop in the Sensex on December 9, its steepest one-day fall in six months. Analysts see in the recent, lacklustre performance of some older telecom stocks the effects of the controversial policy changes in allocating spectrum. Real estate companies have fallen from grace in the wake of allegations that they received loans by corrupt means. Given the opacity in the real estate business such allegations gain credibility. The scam is seen to be encompassing not only the real estate companies but also the banking system, which might be stuck with large non-performing assets. However, none of the gloomy prospects need necessarily materialise. All lenders to the real estate companies have vouched for the safety of their loans. Telecom companies, whose stock prices have fallen, might actually benefit from a revamped telecom policy that is fair and transparent. Stock exchanges will immensely benefit once up-to-date surveillance and monitoring systems are put in place and the manipulative practices curbed. The negative impact of scams on stock prices will be tempered if the markets take into account the benefits that will follow from an overall clean up of the regulatory system.