:: Nitish Sengupta

Worst may be over, stock up for a rally

Nitish Sengupta

The depressed state of the Indian stock markets over the past six months, as reflected in both the Bombay Stock Exchange’s Sensex and the National Stock Exchange’s Nifty indices, has been a matter of grave concern, coming as it does after the rollercoaster ride of the previous two-three years, when both of these rose steadily to dizzy heights. Many prophets of doom see this as a reflection of the downward trend of the Indian economy overall. But they are wrong.

The depression started with the much-vaunted Reliance Power issue which failed to rise up to market expectations, and impounded huge amounts of funds normally available in the market. This coincided with two global developments: first, a sharp rise in the price of crude oil; and second, reversal of the falling trend in the value of the American dollar. The first created a worldwide depression, almost like the one in 1929, hitting both industry and businesses extremely hard. The profitability of companies nosedived, causing a depression in their share prices. The second led to the visible withdrawal of funds by foreign institutional investors (FIIs), who had emerged as the largest group of investors in recent times, from the Indian market, and their redeployment in dollar-denominated scrips in the United States. It is understood that during the one-year period ending June 2008, these FIIs have reduced their exposure to BSE’s 500 group companies from 19.9 per cent to 17.4 per cent.

According to data provided by the market regulator Sebi (Securities and Exchange Board of India), FIIs sold net stocks of nearly $35 billion (about Rs 14,700 crores) between April and June this year. Inevitably, the BSE’s Sensex slid from 15,644 on March 31 to 13,461 on June 30. This downward trend has continued ever since, further heightened by general political uncertainty, the tense situation in Jammu and Kashmir and the tough measures taken by the Reserve Bank of India to contain spiralling inflation.

But, perhaps, the worst may be over. Crude prices have started falling in the past one week, setting corrective trends in both the Sensex and the Nifty. Last week, Sensex and Nifty declined 444 points and 99 points respectively. Except public sector oil companies, corporate bodies have in general reported encouraging working results. And interestingly, all the estimates of GDP growth have varied between 8 and 9.5 per cent, never suggesting a return to the so-called "Hindu" rate of growth of the 1960s and 1970s. Also, we have to take into account the coming IPOs, especially from central public sector enterprises, starting with NHPC in a few days. Many others, notably BSNL and Coal India, may follow soon. Free from the octopus-grip of the unimaginative Left parties, the Government of India might vigorously go ahead with several long-pending reforms in the financial and other sectors. Already, the long-delayed deployment of provident fund in the stock market, through private sector mutual funds, has been initiated. This in itself will serve as tonic for the market.

All things taken together, the Indian stock markets are likely to see a rally very soon. Incidentally, in dealing with the recent market downslide, it is important to remember that the dizzy heights to which share prices rose in 2006 and 2007 were largely the handiwork of a section of bulls and did not reflect the true value of many of the shares. Only the shares of about 15 companies hit the ceiling, and this largely influenced the Sensex and the Nifty. A technical correction became overdue. The downslide in a way reflects that.

Tips for investors

(Not Speculators)

This is the time for investors to buy, not to sell. In buying shares, be guided by the dividend record and the reserves of the company. Then you cannot be a loser.

Keep away from speculative scrips (about 12-15 in number) unless you are getting them at a really low price, in which event it is permissible for investors to take on the role of a speculator on a small scale and temporarily. There is no advice for speculators who look upon the share market as a casino.

Dr Nitish Sengupta, an academic and an author, is a former Member of Parliament and a former secretary to the Government of India