It?s not the economy, stupid!

It would be a cardinal error to interpret Thursday?s collapse of stock prices, cataclysmic as it was, as a reflection of the state of the economy.

It would be a cardinal error to interpret Thursday’s collapse of stock prices, cataclysmic as it was, as a reflection of the state of the economy. Little has changed over the past fortnight to justify this precipitate loss of confidence. Indeed, the justifications advanced when stock prices went into overdrive still hold good. The economy is still on course to grow at over 7 per cent per annum. Corporate results, barring a few, continue to be quite sound. Admittedly, results in some sectors have been below market expectations — which does not mean that these companies made losses. Quite the opposite, in fact — most have shown reasonable to good growth in revenues and profits, and look well set to continue to do so. It just means that these companies delivered results lower than what investors and analysts had expected.

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But all these factors are geographically limited to India. Thursday’s crash, which mirrored a downslide in both equity and commodity markets worldwide, is the clearest indication yet of an increasingly globalised economy. Fluctuations in global stock, commodity and currency markets will naturally lead to volatility in entry and exit of foreign funds — money will go where it gets the best return-to-risk ratio. At current levels, a 12,000-plus Sensex was getting somewhat overheated. Hence, the fall should be seen as a correction of previous overcalculations. Professional fund managers had expected this and had clearly prepared for it — the Sensex fell almost 500 points within the first minute of trading on Thursday, indicating a pre-planned exit.

Those who got hurt were small-time investors, who had been speculating on margin money — in other words, buying stocks which they had not researched, with money they did not have. When brokers put in margin calls, these investors could not pay, forcing further sales and a price collapse which continued into Friday. A salutary, if painful lesson on the benefits of a planned, long-term investment strategy. Exchanges, regulators and the government, however, need to reflect on developing a faster and more effective ‘panic control’ mechanism,to squelch unnecessary or mala fide rumour-mongering.