Unpalatable stock market lessons

By C. R. L. Narasimhan

To say that the stock markets continue to be volatile is to state the obvious. But the kind of price movements seen in the last fortnight has been particularly striking even by the standards of the day. The week April 3-7 was especially noteworthy. Along with the usual gyrations in stock prices, the other market related happenings during that week were simply epoch making. Early that week, the Sensex fell sharply by 361 points on April 4. Promptly dubbed the Black Tuesday, it called into question - perhaps for the umteenth time but certainly more potently than on previous occasions - certain cherished beliefs connected with the recent stock market behaviour in India and abroad.

That week also saw action at the highest levels of the Government in support of the stock market. In effect, it was trying to mollify the all powerful foreign institutional investors. A handful of them had received notices from the Income-tax Department over alleged violations of capital gains provisions of the Indian tax laws. A specific issue: Is the allegation justifiable under the provisions of the double-taxation avoidance treaty with Mauritius? Those FIIs have routed their funds through that country.

Government steps in

No less a person than the Finance Minister took pains to comfort the institutional investors. The notices to them on their alleged tax transgressions were withdrawn. Maybe, there was never a case against them, the Indo-Mauritian tax treaty was probably not interpreted correctly, but to view the episode as a purely tax matter would be incorrect. Nor is it a case of reining in excessive bureaucratic zeal. Official action and especially the Finance Minister's personal intervention (he appeared on the TV too) were targeting stock market sentiment. That by itself need not be a bad thing. For good or for bad, official actions especially involving the fisc can move the markets. Anyway, in the instant case there was a perceived injustice to an important investor class - not all of them certainly but an influential part. The possibility that they might stay away from the markets - because of ``some misplaced'' bureaucratic zeal - prompted the Government to promptly allay the misapprehensions.

Seen in a larger context, the Government action does send out several wrong signals. If the IT department had issued notices on the basis of an incorrect interpretation, the Government ought to remedy the situation, through soft-pedalling maybe, but not through high-profile interventions. A related question: do not ordinary tax payers deserve the same kind of redress mechanism?

What has come out loud and clear is the stranglehold these FIIs have come to acquire on the Indian market. They, along with domestic institutions, are able to swing the market at will. In fact, a principal cause of the extraordinary volatility in the recent stock market behaviour has been the almost cartel type operation. Unfortunately, the Government, far from recognising it as a serious deficiency that it is, seems hell bent on buttressing those forces that are exponentially increasing market volatility. The deleterious consequences have already become apparent.

In the event, even the narrow goal of sustaining the bullish factor came to naught. Last week (April 10 to 14), the stock markets, true to form, continued to be volatile. Notwithstanding the better than anticipated results announced by Infosys and Satyam, the markets were on a roller coaster. Once again, market operators cite several additional factors as being responsible: the connection with Nasdaq stocks - the technology exchange has witnessed huge falls recently, quite spectacularly last week end. A senior Nasdaq official, who was in India recently, has said that there need not be such an immediate correlation between the American exchange's valuation and Indian stocks. ``The reaction to Nasdaq stock movements is not rational,'' he said. However, the Nasdaq factor will be in full play this week but by how much or for how long no one knows.

For most non-institutional investors it is, therefore, back to guessing the likely stock market trends. They are none the wiser: even the Finance Minister's articulation of the stock market's cause - after all he was espousing the need for a sustained high performance - has not cut much ice. On the contrary, by taking such a stance, the Government may be undermining its own role and at some point its own credibility. The official policy ought not to - even by implication - underpin today's stock operators. The latter's actions are acquiring a particularly odious connotation. If, on the other hand, the Government was hoping to help restore the euphoria, it was sadly disappointed. On April 13, the last day of the week, the Sensex lost 255 points.

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Section  : Business
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