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Sensex sensitivities

The crash this week in Mumbai’s high-flying stock market is a cause for concern, but there should be no room for panic.

india Updated: Jan 22, 2008 21:58 IST

The crash this week in Mumbai’s high-flying stock market is a cause for concern, but there should be no room for panic. It is time, nevertheless, we asked some questions on the business of what stocks are, and are not, in a globalised economy. For one, the bull run of the past couple of years has been largely fuelled by Foreign Institutional Investors (FIIs), who, in effect, represent large pools of savings from all over the world, particularly the West. The frenzied FII-powered rise in the 30-share Sensex has been a vote of confidence in India’s economy and the performance of its corporate sector. However, success often feeds on itself, and opportunists and greedy traders land up at a party and make merry as long as it lasts, throwing caution to the winds. India’s economy continues to have strong fundamentals and corporate earnings should hopefully reflect this reality.

The problem lies in what one could call a speculative culture, which is part of the baggage of market economies. Many players in the market have been buying up shares in anticipation of a further rise, with an eye on more purchases by FIIs rather than the intrinsic value of the shares. From taking speculative positions in the derivatives market to borrowing from banks, the money that powers such purchases is on shaky ground. When FIIs cut down their exposure to India or behave cautiously, these players are rattled and are among the first to flee by unwinding their positions. This causes panic all around. FIIs are, in turn, guided by global concerns. With indications that the crisis in the US spawned by ill-deployed home loans is bigger than earlier thought, a recession stares the US in the face and it looks like the Sensex has been hit by global uncertainties and local unwinding of speculative positions.

The key point to remember is that despite a 20 per cent fall and a small recovery in the Sensex, the intrinsic value of the earnings forecasts of many Indian companies remains intact. Some analysts even spot a buying opportunity. It is also pertinent to remember that as many as 43 global indices have been gripped by a bearish mood linked to the US recession. The US has long been seen as an engine of global economic growth and a crisis there is bound to cause an impact all around. Hopefully, when all the dust settles, India’s economic growth will still remain attractive for global and local investors alike. This is also a time to remember that globalisation is a double-edged sword: it carries both opportunities and threats arising from an economy being part of a very large world.