Surges and falls

There should be space for small investors too
One thing can be said of the stock market with complete confidence: it is not for the faint-hearted. For the last month it has been a nerve-racking ride up to euphoric heights followed by a panicky fall; over Rs 100,000 crore in market capitalisation added and wiped out in a short span of time. What is worrisome is the illogical behaviour of a market that can be talked up and pulled down in rapid succession. When movements have only the barest relationship to what is happening in the real economy, there is cause for concern. And the chances are the whole cycle will be repeated for more profit-taking before the year is out. Although the economic environment as a whole is positive, the market is more unpredictable than usual. It is driven by speculation so much so that smallish shifts develop all too soon as on Monday into big herd movements. When the BSE rose to a historic 5000-plus in mid-October it was in part a psychological bursting forth of pent-upenergy after five frustrating years in the bourses. But it was also the appropriate way for the market to respond to the fact that most indicators, political and economic, had at last begun to turn positive. The coalition at the Centre was more stable than before and ministers were speaking strongly in favour of reform measures.

A GDP growth rate of around six per cent was being generally predicted and after a long period of sluggishness exports were improving. Moody8217;s upgrading of India8217;s rating confirmed the upbeat mood in the beginning of October. If anything, good news continued in a steady stream into the second half of the month. There were no flip-flops from the government on diesel prices. True to its word, the government was bringing forward major legislation starting with the insurance regulatory and money laundering bills. Inflation remained under control. Corporate half yearly results showed sales and profits were better across a broad swathe of industry and business. The RBI made more creditavailable by cutting the CRR by one percentage point. In sum, the signs for an industrial recovery and economic turnaround were starting to look promising. How-ever, even though optimism held up everywhere else in the second half of October, the markets, oddly enough, reacted by driving down share prices.

Speculation against the underlying positive tre-nd by large players would account for such contradictory behaviour. A certain amount of speculation is unavoidable and indeed, essential to keep the wheels turning. Sebi8217;s regulations restricting daily price movements in key scrips to an eight per cent band help reduce volatility. But for that prudent measure October would doubtless have seen huger surges and falls.

Nevertheless, a continuation of the current volatility does not bode well for the health of the market and Sebi would do well to look into the causes of it. Stable capital markets are desirable and especially at a time when the return of the retail investor via mutual funds or otherwise seemsimminent and the economy needs all the fresh investment it can get. Investors will turn wary very quickly if the markets are seen to be in the grip, as seems to be the case, of big speculators, the home-grown variety as well as the foreign.