No sinking feeling

A rational correction at this juncture need not necessarily worry us. If the economy grows at around 8 per cent and if corporate earnings stay on course, corrections will become healthy blips on the radar.

It has been said time and again that stock markets are not really rational creatures. Or else we would all be millionaires. But two days of consecutive plunges in the country’s premier share index should certainly make us sit up and take notice. The steep fall of nearly 3 per cent in Mumbai’s 30-share sensitive index on Monday was followed by an encore on Tuesday, which also saw the index dip by as much as 4.4 per cent in intra-day trading. The index closed five points below the psychologically crucial 13,000 points. Should that worry us? On the face of it, yes, because volatility and bear hugs are both bad for the market. However, it may be better to view the underlying reasons for the fall and take heart that this market has had valid reasons to see a correction and may yet recover for equally valid reasons.

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The immediate provocation for the fall in the Sensex was a decision on Friday by the Reserve Bank of India to increase the cash reserve ratio (CRR) — the share of cash that banks are obliged to park with the RBI. This signal to tighten money supply rationally translates as a potential fall in overall demand, and hence, slower economic growth. Or else, it signals the central bank’s concern over inflationary pressures. Either way, the provocation, and hence the fall, were rational in nature. The fact that this happened on a day when it was not clear if Tata Steel would be able to acquire Anglo-Dutch steel maker Corus Group at a reasonable price certainly added momentum to the fall. On Tuesday, industrial growth data was below market expectations, and foreign institutional investors (FIIs) were heavy sellers. FIIs have been propping up the market, and it is wise to remember that December is a time that expatriate fund managers take off for their annual vacations and usually spend the month booking some profits or putting their books in order to show their bosses and investors. Everything matters now for the Indian economy — from global oil prices to domestic inflationary pressures, from concerns over interest rates to how sustainable corporate earnings growth can be.