The flip side of globalisation

Never before, probably, has the sensex moved as wildly as it has in the past three months. During this short period, the bellwether index of the Indian stock market has shed more than 30 per cent off its January 10 peak of 21,206.77 (on March 17, it closed at 14,809.50). Besides that drop, which happens to be the second-biggest after Turkey during a phase when global stock markets have been in turmoil, it has been the intra-day yo-yoing of the Sensex that has been most perplexing. On an average, during the past three months, the swings between the day’s highs and lows have been around 3.24 per cent—compared to just 1.8 per cent during 2007.

What is the matter with the Indian stock market? Well, the easy part is that since the beginning of the year, foreign institutional investors (FIIs) have been selling more Indian stocks than they have been buying.

Till March 13, these investors recorded a negative flow of over $3 billion (Rs 13,065 crore). Why? Does it mean that the India story, with its 8-9 per cent growth, strong corporate earnings and other positive fundamentals, is turning gloomy? We may be tempted to say yes, but that would be wrong.

To be sure, the manufacturing sector recorded a mere 5.3 per cent growth in January 2008 and official estimates of GDP growth are around 8.8 per cent, a little below 9.4 per cent for 2006-07. Inflation, currently at around 5.1 per cent, has also been worrisome of late.

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Yet, these cannot be the trigger for Indian stock prices to plummet the way they have.Instead, the reasons are to be found outside of India, the US, to be precise. With the US economy now quite clearly heading towards a recession and the mayhem in the US credit market after the subprime crisis, FII flows into the Indian market, two-thirds of which come from the US, have been hit badly. Other trends, like skyrocketing oil and commodity prices, have also strengthened the bearishness on the bourses.

For the moment, even the slightest rise of the Sensex is a cue for investors to square up their positions by selling, thus, giving rise to the volatile see-sawing that the market has been witness to in recent months. Much will depend on factors such as the US economy, the real effects of the subprime crisis on US financial institutions and, of course, oil and other commodity prices before we can expect a semblance of stability on the Indian bourses. Welcome to global integration.