Sensex and sentiment

Manic Monday was not such a disaster after all. For the time first ever, the Reserve Bank of India and the government seem to have heeded the capital market as an integral part of the economic system, when they stepped in to stabilise the market and curb the damage. The results were almost instantaneous 8212; the benchmark Bombay Stock Exchange Sensex rose over 450 points from the day8217;s low 15.5 per cent down before drifting down again towards the end of trading. The extent of the fall was unprecedented and its speed unnerving. It was the biggest meltdown in the recent history of the capital market. Not even after the Scams of 1992 or 2000 had stock prices fallen as broadly or dramatically as on Monday. Stock exchanges had to be shut down twice, first after the 10 per cent fall and again after a 15 per cent decline. So rapidly did prices fall that the sum total of trading time before the second circuit breaker was applied was barely 30 minutes.

Foreign institutional investors, which brought over 7 billion into the Indian market last year, will play an important role in setting the direction of the market and they are clearly worried. Their concerns include the government8217;s willingness to pursue structural reforms and public sector disinvestment; a suddenly weak rupee also makes their investments more vulnerable. But first, what could have caused the meltdown on Monday over Friday8217;s 8 per cent drop? For starters, the shape of the Congress-led coalition is unclear. The Left and the DMK group have been voluble about their economic and political wish list, but refuse to join the government. Meanwhile, statements and clarifications issued by Left Front leaders have only demonstrated their chilling lack of understanding of capital markets. They raised the bogey of short-selling by a phantom bear cartel, while a trade union leader made the ludicrous claim that foreigners were trying to influence the government8217;s agenda by forcing stock prices down.

Manmohan Singh8217;s attempt to stabilise the market also had little impact since he was unclear about the coalition8217;s economic policies. Moreover, it was obvious over the weekend that he would not even head the committee framing the Common Minimum Programme. No major turnaround in sentiment can be expected unless the new government8217;s CMP documents the direction of its economic policies.