IndiaÆs stock markets have risen sharply from just under 10,000 at the beginning of the year to cross 12,500. Bears had long uttered words of caution about how fast the Sensex had added the last 2,500 points versus earlier gains. Indeed, in its June editorial page comment FinanceAsia magazine observed that a correction was clearly imminent - and between the words being written, the issue going to print and its distribution, the correction seems to have happened with a savage speed.
IndiaÆs finance minister, Chidambaram has been in the eye of the storm as a statement he made suggesting that higher taxes for foreign institutional investors (ôFIIsö) could be under consideration coincided with the selldown. Foreign inflows are largely responsible for the bull run with an estimated $4 billion invested year-to-date (that is on top of in excess of $10 billion invested in the course of 2005). Chidambaram has gone on record subsequently to say that no such tax plan is underfoot. Yesterday he tried to alleviate panic selling, reassuring investors that the system had enough liquidity to meet margin requirements.
Those in the know, while attributing the fall to more than just the FII tax scare, took ChidambaramÆs words with a pinch of salt. Rajesh Baheti, proprietary stock trader and hedger comments, The futures and options segment is currently very highly leveraged. And while concerns about liquidity could be overstated concerns on valuations could be understated. Markets are likely to remain volatile in the near future.ö Certainly, foreign investors who offloaded more than half a billion dollars worth of stock last week (belatedly) agreed with BahetiÆs assessment.
It was small consolation to the India bulls that the market mayhem was neither restricted to India nor to the equity markets. Events in India mirrored those elsewhere in the world with concerns regarding interest rates and inflation taking their toll on indices. LondonÆs FTSE ended the week 4% down, its largest weekly percentage fall since 2003 and continued to fall on Monday.
Worldwide commodity prices were also adversely affected during the week with both gold and copper drifting downwards. The cumulative effect of these factors saw the rupee drop to an all time low of Rs45.82 against the dollar. Srinivasan, JP Morgan IndiaÆs head of markets says, however: ôThe currency will be fairly well controlled and the RBI [IndiaÆs central bank] will smoothen the move.ö S. Mukherji, managing director, ICICI Securities shares SrinivasanÆs confidence: ôThe decline in the rupee is lower in the current period (2.4% since April 1 - as compared to 3.9% between April 1, 2004 and May 21, 2004 - reflecting confidence in capital flows and the level of reserves.ö
The exchange rate, however, seems the least of the worries plaguing Indian equity investors at the current juncture.
When trading resumed after the one hour suspension markets recovered some ground to close at 10,482. It is not yet clear who was buying. Some of the biggest losers in the course of the correction were stocks which are considered fundamentally very sound û infrastructure play, Larsen & Toubro was down 7%, technology companies Infosys and Wipro were down 10% and 5% respectively, vehicle company Tata Motors fell 10% and another Tata company, Tata Steel lost 6%. In volume terms recently listed Reliance Petroleum was among the highest traded, ending the day more than 4% down at Rs69.55 (though still at a premium to its offering price of Rs60).
Mukherji comments: ôThe India growth story remains intact, macro fundamentals remain as strong as ever, the growth trajectory is firmly entrenched.ö But the question is: are investors in a mood to listen? A parallel with the markets in the Middle East could be timely. All Middle Eastern stock market indices (except Iran) ended 2005 significantly up, with the average annual rise in some markets in excess of 50% year on year over a three year horizon. Earlier this month Saudi ArabiaÆs market shed those gains to close at its lowest in 13 months, down 34% from its 2005 year end close and just shy of 50% lower than its all time high. The bear sentiment effect spilled over to other markets in the region. Structurally, the Saudi market has no similarity to IndiaÆs bourses - especially since there are far fewer listed stocks. But its rapid rise and decline does offer parallels.
For the moment the bears seem to be on the ascendant. And if India were to emulate the scale of the Saudi market's fall (50% from the peak), the Sensex would fall to just below the 7,000 level.