The Hindu : Markets and war

Online edition of India's National Newspaper
Friday, May 24, 2002

Opinion

Opinion - Editorials

Markets and war

ON WEDNESDAY, JUST as the Prime Minister was exhorting the troops on the border to be ready for a war with Pakistan, the financial markets were sending out totally negative signals. Stock prices which have already been sliding fell further in the wake of the war signals. The Bombay Stock Exchange's Sensex closed at its lowest level for this year. A similar trend has been seen in the country's other principal stock exchange, the NSE, too. The normally less volatile bonds and gilts markets have been unusually affected this season. Gold prices have risen spectacularly to touch a six-year high and are expected to further move up. Traditionally in times of great uncertainty investors everywhere turn to gold for refuge. The Indian middle class whose preference for gold is well known even in more normal times is no exception to this trend.

The above snapshot of the financial markets reinforces the known axiom that markets abhor uncertainty especially that caused by a war-like situation. The latter, unlike other contributing causes of uncertainty say those caused by a politically fluid situation or an earthquake or any other natural calamity, tends to depress market sentiment for a long time to come. Unless the war threat recedes, the market indices are bound to slip further. Equally relevantly, the resultant damage will not be restricted to the financial markets alone but will affect the real economy sooner than is realised. Actually, the pains caused by the stock market decline can already be measured. According to an estimate, nearly Rs. 45,000 crores have been lost by way of reduced market capitalisation in just six trading sessions of the BSE since May 13. A substantial erosion in the market value of companies dealing in information technology, refineries and petro chemicals, personal care products, telecom, banks and two-wheelers has already taken place. Key public sector stocks such as those of BHEL and ONGC, which were seen benefiting from the progress of the disinvestment programme, have suffered. The implication is clear that in the present market climate the disinvestment programme, a major policy success and one which has been getting into stride recently, will stall.

The negative market sentiment, if further aggravated, can cause irreparable damage to foreign capital inflows on whose continuity much of the near-term health of the economy's external sector has been predicated. Already in the first four and a half months of 2002 foreign institutional investment has been sharply lower compared to last year. While the RBI and the Government have rightly claimed credit in managing the external economy, there can be no two opinions that it is highly vulnerable in the present situation. The country's external reserves, currently at an impressive $54 billion, are attributable to deft economic management as well as a favourable environment both in India and outside. It is clear, however, that even with that size there is need for a continuous vigil, a point made among others by the RBI much earlier. Many other countries such as Brazil have seen even a larger hoard disappear for reasons more benign and conventional than the war phobia that is gripping this country. The present size of the forex reserves has spawned a debate on their utilisation. None has advocated and it is obviously naive to countenance running down the forex balance to fight a war. A war-chest if it exists is really to fight economic contingencies and uncertainties. Unfortunately, the war psychosis vastly aggravates the existing shortcomings of the economy, which was at last seen coming out of a prolonged recession. Ominously there has been a talk of lowering the country's credit rating. In the past, the nation was able to take those in its stride. One cannot be so sanguine this time.

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