Date:14/03/2008 URL: http://www.thehindu.com/2008/03/14/stories/2008031455551000.htm

Opinion - Editorials

Dispirited markets

In just over two months Indian stock markets have fallen sharply along with most other Asian markets. The Sensex that crossed 21,000 in January dropped below 15,400 on March 13. Extreme volatility continues to haunt the market. While a correction was always expected, its magnitude and the rather short time span within which it has taken place have surprised everyone. Sentiment has swung from unbridled enthusiasm to deep pessimism in a very short time. This has serious impl ications for a variety of investors. Portfolio managers are reportedly booking heavy losses. Those who indulged in proprietary trading and played the markets with their own money would have learnt some bitter lessons. Even mutual funds, officially recommended for small investors, have not acquitted themselves creditably. The net asset values (NAVs) of some top performing equity funds have fallen as sharply as some of the individual scrips. Mutual funds, through their superior investment strategies, are expected to give some degree of protection to their investors from extraordinary market swings. However, funds that have invested a portion of their corpus in debt instruments have fared somewhat better. The time for debt funds has certainly come. The ongoing initiatives to usher in a vibrant corporate debt market — they include quite a few of the budget proposals — will go a long way in promoting corporate bonds. It is hoped that, with a greater availability of long-period debt instruments, mutual funds dedicated to infrastructure funding will benefit.

There are other important messages from the steep declines in stock prices. The booming new issues market has suddenly come to a standstill. A few credible public issues had to be withdrawn; not just Reliance Power, many other companies that were listed on the stock exchanges at a high premium are trading at a discount. Many companies are deferring their fund-raising plans through the IPO route. That in turn is bound to impact adversely on capital formation especially by the private sector that has played a stellar role in recent times. The economic indicators from the United States are widely expected to get worse before improving. The turmoil in the financial markets continues unabated. A recession in the U.S. seems unavoidable. India and other emerging markets are bound to be affected in varying degrees. The lack of direction in the Indian stock market is seen in its negative reaction to the latest budget. It missed the budget’s projection of economic growth well into the future as also the significant reliefs in personal tax and cuts in excise and import duties.