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Stock and awe

india Updated: Aug 03, 2007 00:24 IST

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The global meltdown in stock prices has, as was only to be expected, hit Indian stock markets hard. Expected, because globalisation has both an upside and a downside. For quite some time now, Indian corporates have been reaping the benefits of a sustained boom in global economies, as well as easy access to cheap credit in overseas markets. This has helped them to grow rapidly in size, expand their international presence, finance large mergers and acquisitions abroad, and show healthy profits. Expectedly, this made their stocks attractive investments, both for domestic and foreign investors. The result has been a Sensex on steroids, and a massive influx of foreign funds. As of August 1, data released by markets regulator Securities and Exchange Board of India shows that foreign institutional investors (FIIs) had pumped in more than Rs 43,237 crore, or over $10.3 billion, into Indian equities. This is a massive vote of confidence in the Indian growth story. FII buying has, in fact, been one of the major accelerators of the Sensex’s rapid rise. However, this comes with a caveat: this money originates overseas, and will inevitably react to overseas linkages.

The massive slide over the past few trading sessions, therefore, has to be seen in context. Worries over looming credit defaults in the US sent stock prices crashing worldwide. The tremors rocked India as well. In just two days of freefall, the benchmark Sensex has shed more than 1,100 points. Investors — both big and small — have been hit hard. On Wednesday alone, the combined value of listed stocks declined by Rs 1,81,000 crore. However, most analysts see this as a ‘correction’.

The fundamentals appear to justify this view. Over the past five years, the Sensex has a return of almost 500 per cent. This year’s return, despite the crash, is still over 28 per cent. More importantly, the Sensex’s long-term trend is still charting an upward path. Our economy is also not heavily dependent on the US. The International Monetary Fund raised its global growth estimate to 5.2 per cent barely a fortnight ago. India’s GDP growth for the current fiscal is expected to be in the 9-10 per cent range. While investors definitely need to tread cautiously in the short-term, the long-term outlook is still positive.