Losing the sheen

The benchmark stock indices, Sensex and Nifty, plunged to new lows on Tuesday. The Sensex lost almost 500 points to close below 13,000. The Nifty went below the psychologically important 3,900 level. On the first day of the new quarter, the indices were at levels last recorded during April 2007. From those low points the Indian stock markets rose to dizzy heights with the Sensex peaking at nearly 21,000 in January. Since then until Tuesday, the markets had fallen by as much as 36 per cent. On Wednesday, the markets recovered sharply with the Sensex closing nearly 700 points above the previous day’s figure. However during this year there were several such rallies that did not last long enough to reverse the general declining trend. In any case, the overall trends do not indicate that the stock markets have reached their lowest points and are poised to go up on a sustained basis. In the second half of 2007 Indian stock markets were among the top performing emerging markets. On their way down during this year, they are among the worst performing ones. A plethora of bad news including some from abroad have contributed to sharp declines in the markets in India. Inflation currently ruling at over 11 per cent is expected to remain so for some time. Fuelled by record oil and commodity prices, inflation continues to extract a heavy toll on the equity markets everywhere. European and U.S. equity markets have just recorded their worst half-year performance in more than a decade.
With oil prices unlikely to moderate, governments and central banks across the globe are gearing themselves to tackle the consequences. Some of those measures would necessarily involve monetary tightening even if that entails sacrificing growth. A related problem has been the continuing U.S. financial crisis. As many banks continue to provide for loan losses, there has been a growing tendency for risk aversion. At this juncture global investors are flocking to the safety of debt instruments and developed markets. India seems to be low on the list of their preferred destinations now. That has meant a sizable withdrawal of portfolio money from Indian stocks. The macroeconomic outlook in the country has become more uncertain and economic growth is expected to be sharply lower. The widening current account deficit, expected to touch 3-3.5 per cent of the GDP at the end of 2008-09 is a major cause for worry. The government which prided itself on fiscal rectitude has virtually given consolidation the go-by. Finally, of course, the prospect of general elections has heightened the uncertainty in financial markets.