Opinion - Editorials

Muted exuberance

The relatively muted reactions to the Sensex crossing the 13,000 mark on Monday, October 30 are to be welcomed for a number of reasons. On earlier occasions when the benchmark index went past important milestones such as 10,000 and 11,000, there were exaggerated claims by many market participants and observers about the potential of the share market mechanism to create investor wealth and help in capital formation. Such hype tended to obscure the fact that for all the apparent attraction the Indian share markets hold for some investors, they continue to suffer from major deficiencies. There is no evidence yet that investor participation is sufficiently broad-based. Only when a much larger number of retail investors join the dominant foreign institutional investors (FIIs) and the domestic mutual funds will there be stability in the markets. The recent rally past the 13,000 appears to have been once again fuelled by the institutional investors, both foreign and domestic. The expectation that domestic financial institutions would act as a counterweight to the FIIs has not been realised fully. It is well known that the FIIs' decision to stay invested depends on a number of factors extraneous to India. In fact, even at the much broader level of the country's balance of payments, the crucial role the foreign flows have come play is a matter of some disquiet. More recently, there have been concerns over the identity of the overseas investors who have been coming through the participatory notes route. As for domestic mutual funds, their growing stature both in terms of their ability to raise funds and the sophistication of their investment decisions is to be welcomed. However, a great deal more needs to be done before they can emerge as the desired investment option for most individual investors. High intermediation costs and deficient after-sales service have been among the causes of particular concern.

More specifically, all positive interpretations of the heady run of the indices this week — the Sensex and the Nifty closed at their highest ever levels on Friday — must be tempered by the fact that the rally is not broad-based. The BSE's indices dealing with smaller stocks do not match the heady valuations as reflected in the Sensex's movements. It is a sign of maturity therefore that the rapid rise of stock indices this year — the Sensex was at a level of 10,000 in early February — has been viewed with a measure of equanimity this time. Macroeconomic trends and corporate results have been encouraging in recent times, and the share markets have naturally captured this optimism. It remains to be seen if they will emerge as a good enough barometer of the performance of the economy.

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