Calm down

The beating that Indian equities have taken this week has been in response to both global and local factors. While the drop of 12.6 per cent in the last six days appears bruising, it should be seen in a larger perspective. Let us not forget, for one, that from May 2003 to May 2006, overall indexes went up by roughly three times: the Nifty rose from 1,000 to 3,279. Compared with these enormous gains to equity holders over this period, the recent fall is small. Millions of small investors all over the country who invest their savings in equities and in mutual funds have gained significantly by holding on to their portfolios.

The media reaction to the stock market movement has been extreme — a private TV channel even invited an astrologer to predict where the market will go. While the media is prone to exaggerate the ‘bloodbath’ that has taken place, in reality the present Nifty level of 3,279 merely takes investors back to the Nifty level of March 24. The “largest ever decline in Indian equities” merely reflects the fact that we now have a bigger base. Moreover, market volatility is an inescapable part of modern capitalism. Equities would not generate superior returns, in the long run, if they did not impose such volatility upon investors.

The Left has done well to hold their peace. No witch-hunt has been initiated. While the initial reaction to the fall was one of celebration, consistent with the Left view that the stock market is about a few rich and evil traders, this was soon corrected. Sitaram Yechury appeared both wise and prudent in his reaction to the market. The issue of long-term capital gains tax is debatable, but it is welcome that the discussion is focussed on policy questions rather knee-jerk reactions. The biggest danger today is that of over-regulation, which can stifle the healthy growth of the market. In large competitive markets, millions of market participants shape prices. For indexes such as the Nifty, the size of the market is too large for distortion by any one market participant or cartel.