The Hindu : Market equanimity

Online edition of India's National Newspaper
Monday, Aug 25, 2003

Opinion

Opinion - Editorials

Market equanimity

THE ONGOING RALLY in share prices has been interpreted in various, often contrary, ways. The first big question to which there has been no unanimous answer is: will the rise in the share prices — the benchmark share indices have climbed to a 30-month high — be more enduring this time than at any time in the recent past? On the one side are analysts who feel that the rally can be sustained. They cite strong and improving economic fundamentals as well as a vastly superior recent corporate performance. The external economy has been a bright spot. Reserves have grown to record levels. Foreign institutional investment continues unabated, with the stock market being the major beneficiary. The rupee has been strong and holding its own against major currencies. Inflation has been contained below 5 per cent. Following the satisfactory monsoon, the rural economy is poised for a major recovery, in turn boosting rural incomes and purchasing power. The GDP growth during the current year is expected to be in the region of 6.5 per cent compared with last year's 4.4 per cent. Corporate performance across major sectors has been impressive, the more so because the improvement is attributed to genuine productivity gains and not such fortuitous factors as the fall in interest rates. Without disputing all this, the contrary view holds that a resilient economy and much better corporate results do not by themselves point to a long and sustained stock market rally. Too often in the recent past, a dramatic drop in share prices has followed an upsurge even if the latter had been fuelled by some positive economic or political news.

What is germane to the debate is not just the sustainability of the present rally. The key question is whether the stock market is a good enough gauge for measuring or evaluating economic policies and corporate performance. Admittedly, even the markets of the developed world have recently disappointed in this critical role. The technology bubble of the late 1990s was kept artificially inflated when common sense suggested it should have been punctured long before it actually was. In India the correlation between economic news and share market prices has never been strong. To be euphoric when the markets look up and utterly despondent when they fall is an all too common tendency. This has often prevented policymakers from taking a sober stance towards the capital market. Basic issues such as the desirability of extending bank finance to the stock market or delineating an appropriate role for traditional intermediaries such as brokers remain controversial. Capital market regulation too has suffered. Regulators have been criticised for not being proactive and detecting scams early enough. That has made them take extraordinarily defensive positions. A fortnight ago, the SEBI chairman advised investors to be wary of manipulations, without elaborating what they were.

Ordinary investors know even less about the sustainability of the rally. Hurt by numerous shenanigans in the past, they were forced to desert the capital market. Their return in strength is a necessary condition for sustaining the rally. The hope is they will draw correct inferences this time. Many sectors of the economy have joined in the rally and, unlike earlier occasions, the upsurge in their share prices matches their performance. Moreover, global share price trends to which Indian prices are increasingly linked have been positive. Yet there is no reason to be bullish in the old manner. Speculators have pushed the markets to dizzy levels. Small investors who were drawn in have suffered grievously, as they did in February 2000 when the Sensex touched 6000.

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