The Hindu : Stability need of the hour

Online edition of India's National Newspaper
Sunday, Apr 21, 2002

Business

Business

Stability need of the hour

By Oommen A. Ninan

MUMBAI APRIL 20. While the stock markets are witnessing all round selling pressure following lower than expected financial results and political uncertainty at the Centre, other financial markets too are reeling under political instability.

"Until the political situation gets stabilised, the market will move southwards. If this confusion continues for long, it will perpetuate further fall which will not be in the interest of the economy," said V. R. Srinivasan, financial analyst. However, he said foreign institutional investors continue to be bullish even though the political developments are causing concern.

The benchmark Bombay Stock Exchange 30-share sensitive index (Sensex) dipped by 146.50 points to 3364.40 during the week ended April 19 from 3510.90 in the previous week. On the National Stock Exchange, the S&P CNX nifty index fell by 36.20 points to 1110.30 from 1146.50.

The developments in the last two months on the social and political fronts has clearly exposed the absence of leadership in steering the country in a challenging environment. The country is yet to learn a lesson from China which steadfastedly focussed on economic development in the last decade, keeping all ideological differences aside. Unfortunately, India, which was in a commanding position in the beginning of last decade, was complacent of its position which has now deteriorated to such an extent that it has a long way to go even to stabilise the economy, leave alone competing with China.

With few news from the corporate side, the market became a victim of the Gujarat events. It is now clear that unless the politicians get their acts together, the rule of the jungle will prevail pushing the country to the brim. Even now, it is not too late, provided the political leadership has the courage and conviction to take the correct steps in restoring confidence among people. The economy will soon bounce back in the backdrop of good leadership and proper reforms. The only

silver-lining for the economy is the Government's resolve to proceed with the disinvestment and not get bogged down with the (political) number game. It now appears that the Union Finance Minister may not roll back most of the initiatives taken in the budget to mop up resources despite pressure from the allies.

Wipro has announced less than expected growth. This is more because its concentration in certain sectors which were more affected by the September 11 incident. Wipro chief, Azim Premji, has used this opportunity to be more cautious about the future but the manner in which Tata Consultancy Services (TCS) has been signing clients shows that it is more a company problem than industry problem. "Software will continue to perform well and the growth will be more on IT enabled services than the usual project business," Mr. Srinivasan added. Another disturbing factor so far as the market is concerned is the speed with which multinational corporations (MNCs) are privatising their Indian subsidiaries. This reduces the number of good companies available for investment.

Good response to Govt. paper

The benchmark ten-year yield moved up from 7.26 to 7.32 per cent in the week under review on political concerns and as the market absorbed the supply of Government papers by the Reserve Bank of India mainly through open market operations (OMOs) and auction of 15-year paper for Rs. 6,000 crores. This long term paper was also fully subscribed at a cut off yield of 7.49 per cent. This issue is trading at a premium post-auction.

Call rates tightened marginally ahead of the reporting Friday and showed some volatility on that day. The RBI has also announced the auction of State loans for Rs. 4,100 crores to be held next week.

Going forward, expectations from the policymakers will likely to drive the market up. However, the risks come from political front and may be an auction announcement as the WMA balances are high.

The political developments have also hit the Indian currency. The rupee fell to an all time low and recovered to close stronger at 48.90/91 a dollar on Friday.

The spot rupee closed at almost the same level of the previous week which was 48.89/90 a dollar. Repeatedly, the RBI Governor had said that it had no targets for the rupee's exchange rate. It would have been in line with the facts (if it maintained) that it had no downside targets for the rupee while the upside target against the dollar was in place.

The recent West Asian crisis probably saw, for the first time, the dollar losing its attractiveness as a safe haven currency. Moreover, the advent of Euro as a reserve currency probably points towards a correction of the dollar in trade-weighted terms.

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