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NRIs panicky over market slump

The big question the investors are asking themselves is: Has the India success story turned into a disaster?

india Updated: May 22, 2006 15:24 IST

Many NRI investors in the US and Britain got a big shock as they started their day by catching up with news from India and found the Bombay Stock Exchange taking a nosedive for six consecutive days.

"Oh my God, not again!" cried Manibhai Patel from Nairobi as he read the news and realised that his stocks had taken a big hit.

The big questions the panicky NRI investors are asking themselves are: Has the bubble burst? Have they lost their investments? Has the India success story turned into a disaster?

Last week, the market index slumped by 800 points in 48 hours and ended down by 1,347 points. It slumped in a more dramatic manner than it rocketed to set a new record of 12,000 on May 11.

It took the Sensex six months from December 9, 2005, to May 11, 2006, to shoot from 9,000 to 12,000 points. But it took just one week to shed almost 1,500 points -- such was the slaughter. No wonder market analysts renamed Dalal Street or broker's street into "Halal" or slaughter street.

The short answer to all these questions is: Hold on! keep two basic factors firmly in mind: one, the economic fundamentals for India remain unchanged as the GDP is still growing strong, the listed companies are still making profits, the manufacturing and export sectors are doing well, the foreign exchange reserves went up by more than a billion dollars last week, the inflation is under control and economic life goes on as usual.

The second factor is that there are no 'technical' reasons for the market to collapse. This means that there are no scams or news of large-scale manipulation on the exchange.

Then why did it go crazily down? Global reasons -- Markets in the West and in Asia tumbled.

The US interest rates went up, the oil prices have been zooming up, the metal prices suffered a meltdown and the foreign institutional investors or FIIs with heavy investments started to sell.

Another factor which many believe triggered the crash was the confusion caused by a circular issued by the Indian government on taxation that indicated that FIIs would be taxed at a new rate.

On Saturday, Finance Minister P Chidambaram clarified that the circular was only intended to solicit the comments of the public and there was nothing in it to suggest that FIIs would be taxed a new rate. "The position in this regard is well known to the FIIs," he said.

"The growth story continues to be a growth story" and the fundamentals of the economy were "sound and strong" - high GDP growth, buoyancy in growth of the manufacturing sector, low inflation and burgeoning foreign exchange reserves, said Chidamabaram, making it clear that the demand of the Left parties to introduce long term capital gains tax would not be entertained.

"The government has no intention to introduce long-term capital gains tax for securities traded in the stock markets," Chidamabaram told a press conference.

So can the NRI investors, FIIs and indeed the Indian investors ride this storm? All investment experts have advised the investors to hold on to their securities and Mutual Funds.

The market will turn around again, but the unknown factor is when? Considering the strong economic platform and close scrutiny of the market, it could be sooner than later.

However, one new factor has emerged for Indian markets -- that now India is closely tied to global developments.

Unlike the Asian financial crisis of 1997, when Indian markets remained unscathed from the meltdown, this time the Sensex succumbed and registered the steepest ever fall in its history as well as experienced high volatility.

Mutual Funds, by and large, always cushion the shock for any fall. In fact, Mutual Funds will never fall as much as leading stocks.

One, this 'managed' route to investment, the Fund Managers, track the market trends and reduce their exposure. In the light of the latest bear run, the investors can reduce -- or even withdraw -- their stake in Mutual Funds with exposure to commodities. Fund houses are using this opportunity to buy cheap, as net buyers in the market.

And this is the best time to buy before the stocks turn around upwards again for the bull run, remembering that stocks and Mutual Funds always rake in profits in the medium to long run.

Global markets stabilised by the weekend and thus FIIs should start buying on the market once again.

The finance minister's statement has clarified the picture for FIIs. Many speculators are out of the market due to this fall as Futures and Options positions are down.