Stock prices rule weak

By Oommen A. Ninan

MUMBAI, SEPT. 2. The market sentiment is bearish and any movement on bourses will be stock and sector specific. However, investors could buy stocks with medium to long term outlook. The recent annual report of the Reserve Bank of India points out to a systemic failure which resulted in the recent market crisis as well as the present condition of the market.

The benchmark Bombay Stock Exchange (BSE) 30-share sensitive index dipped by 60.56 points at 3244.95 compared to the previous week's close of 3305.51. On the National Stock Exchange, the S&P CNX Nifty Index was down by 16.55 points at 1053.55 compared to 1070.10 recorded on the previous Friday. On the last day of trading the Sensex lost 41.92 points or 1.28 per cent and the Sensex moved in a narrow band of 41 points.

Stocks lost heavily for four straight days with the Sensex closing at a 50-week low. Technology stocks led the fall due to worries over a sluggish U.S. growth which hurt the market sentiment. On the last day of trading too, technology stocks, including the top line ones crashed on profit booking by domestic investors.

The rating agency, ICRA study held the view that ``the decline in equity prices in India is genuinely a part of global phenomenon.'' In its latest issue of ``Money & Finance'' it stated that world-wide equity markets in 2001 have been weakening, in response to the less than bright prospects for growth in the U.S. economy and what that might augur for the rest of the world. Particularly the hard hit have been the technology sector, as the wild enthusiasm of 1999 and 2000 stand wrecked on the hard rocks of reality. In any event, with markets, individual and institutional investors having dropped a packet, ``the outlook for equity in the coming year does not look very inviting''. The initial public offerings, which had come to be monopolised by technology companies, have become less frequent and ``virtually non-existent in India''.

The Reserve Bank of India in its annual report 2000-01 which was released last week. ``The recent experience in equity markets and its aftermath have thrown up new challenges for the regulatory system as well as for the conduct of monetary policy,'' the RBI stated, adding, ``it is necessary to develop firewalls against contagion stemming from non-adherence to prudential norms and regulatory guidelines in certain segments of the banking system.'' Referring to the recent involvement of some co- operative banks in the stock markets through market participants, RBI said that it is important to take measures to strengthen the regulatory frame work for the co-operative sector by removing ``dual'' control, by laying down clear-cut guidelines for their management structure and by enforcing further prudential standards in respect of access to uncollateralised funds and their ``lending against volatile assets.''

``In the light of recent experience,'' the RBI warned, ``it is also necessary for commercial banks to take some corrective measures to reduce undue risks in their portfolio management.'' During 2000-01, banks' direct investment in the capital market instruments declined sharply. Accommodation provided by scheduled commercial banks to the commercial sector through investments in bonds, debentures, preference shares and equity shares (including loans to corporates against shares to meet promoters' contribution) declined to Rs. 10,166 crores during 2000-01 from Rs. 11,738 crores during the previous year. Banks' investments in bonds, debentures and preference shares at Rs. 9,818 crores formed the major portion of their investment in capital market instruments. As RBI cautioned the banks their investment in the capital market is likely to fall sharply in the current financial year, which will add further pressure on capital market.

Stock prices tended to move generally downward between April to July. The Sensex declined by 5.40 per cent between April and July. The RBI said that the slowdown in the industrial sector and profit warnings issued by various software companies for the coming quarters had a negative impact on the market sentiment. ``In May, the Securities and Exchange Board of India announced significant changes in the capital market in keeping with the international practices.

The ban on deferral products in the cash segment by SEBI and the ban by Unit Trust of India on sales and repurchases of Unit Scheme 64 (US-64) units affected the market sentiment adversely in July,'' the RBI felt.

The subdued market sentiment continued in August. Differing to ICRA study, RBI stated, ``the Sensex declined by 6.6 per cent between April 21 and August 14 in sharp contrast to gains of 10.2 per cent by the Nasdaq and 6.5 per cent by the Dow Jones.'' This proves that the systemic failure, especially the failure of the market regulator, which resulted in the recent crisis and continuing gloom in the Indian capital market rather than global slowdown.

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