Markets tanked on August 1, headlines said. But did they tank? A 615 point fall when the Sensex is nearly at 15,000 is very different from a 564 point fall with the Sensex at around 4500. The latter was on May 17, 2004, when in the first flush of the UPA’s victory, Left leaders thought revolution could be brought about via TV sound bites. At that point the market fell by over 11 per cent. On Tuesday the fall was a shade under four per cent. If one ranks market falls since May 2004 by percentage, a more than 10 per cent decline has been recorded only once, the 564 point drop we have already mentioned. There have been bigger absolute drops. The Sensex fell by 826 points on May 18, 2006. But set against a Sensex at 11,000, the decline was 6.8 per cent. Take a closer look: in the top ten list of percentage-wise market falls since May 2004, there are just three 5 per cent-plus figures. All this says something which should be obvious but isn’t: India’s capital markets are deepening and maturing. When indices decline, it is necessary to keep this perspective in mind. Happily, market participants reacted with sobriety. Those images of brokers mournfully speculating about the end of the world were absent this time. Brokers know better than anyone else two things: this market has made a lot of money for them and investors and there is more to come, and volatility in a maturing market is actually a good thing. Indeed, the worst possible state for capital markets is stasis. Swings produce opportunity for new investors and new investment. Our columnist today argues that the US housing loans-led nervousness isn’t going away soon but since India’s corporate performance remains above average in global comparisons, the distinction between short and medium terms is easy to make. High risk mortgage (the so-called subprime housing loans) are being re-priced by the markets in the US because risk assessment has changed. Risk assessments will change elsewhere. Investment in emerging markets like India will command higher risk premia because India is now firmly a part of global capitalism. Capitalism needs institutional superstructure and it demands appreciation of dynamic change. India’s capital markets are increasingly showing evidence they can pass both tests.
