Sensex Tensex

But is this wishful thinking or are the fundamentals really turning weak or is there a third, and more sinister, reason for this crash?

Why are the markets falling?
There are two theories doing the rounds: exit polls and bear cartel. The first blames the exit polls that indicate a hung Parliament. Markets internationally do not like political uncertainty and the impact of this in transitional economies is even greater.

But is there a proven link between political uncertainty 8212; against, say, prices or profits 8212; and stock markets? Economic research shows that politics is the most important constituent contributing to volatility across the world. An MIT study titled Stock Price Volatility and Political Uncertainty: Evidence from the Interwar Period in 2002, by Hans-Joachim Voth, found a high degree of correlation between political instability and market volatility in the inter-war period in the 10 developed countries.

Voth also found weaker democracies, as indicated by greater fractionalisation and more frequent elections, were more prone to experience wild swings in equity prices.

While the exit poll reason is the one that is batted around openly, another reason is doing the rounds in the whisper circuit. If the market grapevine is to be believed, a bear lobby has been waiting for another chance to pull down the market before the elections end. This lobby 8212; a powerful group of brokers with the tacit support of some politicians, middlemen and top business houses 8212; triggered a crash when the mega issues of ONGC, GAIL and IBP were about to open. Then Disinvestment Minister Arun Shourie intervened and brought the market back on course.

Any casual visitor to the Jeejeebhoy Towers 8212; home to the Bombay Stock Exchange 8212; in the past six weeks would have heard whispers about the next attack by bears. 8216;8216;Bulls can8217;t control the market for a long time and at one stage bears will get an opportunity,8217;8217; a Dalal Street source told us three weeks ago, adding, 8216;8216;they will strike again during the election process8217;8217;.

After the PSU IPO episode and to coincide with the 8216;India Shining8217; campaign, the bear lobby received direct and indirect signals from the government not to mess with the market again. But once the poll process got on course, things began to change. After the first phase of polling 10 days ago, the market started rising. The BSE Sensex came closer to breaching the 6,000 level again. There were whispers on Dalal Street that it was an 8216;exit rally8217;. In other words, shrewd operators were artificially pushing up the market to sell out.

And now, after the street-smart players have got out of the market before the Black Tuesday crash of 213 points, the regulator has entered. Sebi has called for trade data from the leading exchanges. The big question mark: Is there any political agenda behind the market movement and is it not naive to believe the market is just reacting to an exit poll. The possibility of a market manipulation are high.

What is the market worried about?
The market, if we accept the exit poll theory, is worried about several things. A clear lack of majority will make for political upheaval 8212; not the best condition for a country in a hurry to grow. A car picks up speed only when the road ahead is clear, road signs unambiguous and there8217;s no back seat driving. The markets are afraid of several backseat drivers some of who are plotting to replace the driver, bumpy roads and ever-changing meanings to traffic signals.

This has resulted in sectors most vulnerable to political thought losing value. Bank and PSU stocks have lost value, the BSE PSU index is down 5 per cent and the BSE Banex is down 2.4 per cent over the last week. The possibility of the pace of disinvestment slowing down, fiscal deficit being ignored and the high costs of political squabbling is giving the markets an upset stomach.

But had the reform process not got de-linked from politics. What happened?
While this may be true to a large extent and whichever government comes to power will have to carry forward the reforms, it is the direction and speed that worries the market. The markets will bounce back whatever the political party in power as long as there is no political uncertainty.

Says Jagmohan Nangalia, a broker on the Bombay Stock Exchange: 8216;8216;The stock markets do not want a government with outside support to come to power. This will mean that the new government will dither on major policy issues like disinvestment, economic reforms and labour laws. It may also mean elections in the short term. Hence, the crash.8217;8217;

What now?
The long-term direction of the markets is still on course; the nervousness is largely seen as a short-term market reaction. Says Shivaji Dam, managing director, OM Kotak Mahindra Life Insurance: 8216;8216;The economy is fundamentally strong, and there is no underlying weakness in the market. I believe that in the next five years equity will outperform the debt market. However, I would rather not comment on short-term market movements.8217;8217;

Exactly. The long-term investor should sit tight see accompanying story and the short-term punter is probably already out or playing the derivative market to stay on top of volatility.

Even as Indian investors get nervous, the India story runs strongly amongst the global financial experts. Just the other day, there was an overseas inquiry hunting 8216;8216;a decent brokerage house8217;8217;. To do what? 8216;8216;Oh, we are looking to put together a 100 million private fund in the tech and infrastructure space. India is really the story right now.8217;8217;

The fund manager seemed unaffected by the digestion-challenged Indian market. He, in fact, sounded more confident about the India story than many Indians themselves do. The appetite abroad is good, but we seem to have lost our stomachs 8212; all because the market fell a couple of hundred points.

With George Mathew and the Business Bureau in Mumbai