Dancing to the Nasdaq

After last week8217;s and particularly last Monday8217;s performances, everyone was more or less persuaded that the Indian share bazaar did indeed dance to the Nasdaq8217;s tune. It was hailed, if that is the word, in some quarters as evidence of globalisation. India was seen to join the upward and downward movements in stock markets worldwide triggered by whatever happened in the New York markets the day before. Market rises and falls starting in New York and spreading eastwards round the world look like those spectator waves spreading through sports stadia. If only markets were so easy to predict and every jolt and surge in the Nasdaq was precisely mirrored in the Bombay Stock Exchange the next day! But as was demonstrated on Tuesday and not for the first time, while Dalal Street does respond broadly to New York, it also has a mind of its own. The reasons are obvious.

The financial architecture in the two markets are very different and will result in variable responses to economic signals. Thus, while the Nasdaq recovered smartly on Monday, clawing back over 6 per cent of the losses of last Friday, Bombay was still indecisive on Tuesday. Secondly, the Sensex is strongly weighted in favour of infotech stocks and a high proportion of the business of infotech leaders like Infosys is linked to America. Therefore, the BSE will appear to move in tandem with the Nasdaq as long as it reflects mainly investor sentiment about technology stocks. It is well to remember that FII investment in India and the number of Indian corporates listed in New York add up to the beginning of integration with the global economy. It is nothing like the levels of US-Japan investment and trade, for example, which make the Nikkei and Nasdaq so sensitive to each other.

On the Bombay Stock Exchange the message is investors do not like volatility and, quite understandably, are taking a more cautious view than before. The full effects of Black Friday in the Nasdaq will take some time to assess and be played out. Two things could suggest further declines before a rise. One is sell orders which could not be executed because of the circuit breakers.

The other is redemption pressure on mutual funds. On the other hand, if the Nasdaq rises further or remains in positive territory, there is likely to be a revival of confidence and interest in technology stocks that have in the recent past carried Indian markets into the ether. Positive signals coming from the old economy could also boost stock market sentiment. Industrial sector growth rates are getting better faster. Corporate results are expected to be good and should soon be reflected in the stock indices. So the stock market is bound to go on being a stimulating story. The volatility is bad news. It is bad luck for scores of small infotech companies which after the flight to value caused by Monday8217;s havoc will probably find it much harder to raise capital in the market with initial public offerings.

Continued volatility could do more widespread harm whether induced by external factors or internal factors such as a payments crisis. In that event, stock exchange authorities and the government will have to do what they can to restore stability.