Stock exchange is expected to serve as an economic barometer that is indicative of a country’s state of the economy. Key market indices should provide the pulse of the economy. However, the theory is of little practical value in India. Indian stock markets have become punters’ paradise, a big gambling den for foreign portfolio investors (FPI) who are in control of the trade. The stock markets are rising and falling too frequently for vague reasons to help big time operators book large profits. Take for instance the fall and rise of India’s stock market during the current year.
The benchmark equity indices BSE’s Sensex and NSE’s Nifty showed heavy losses in the beginning of this year, after the economy accelerated to over six percent in 2022-23. During the current fiscal, the economy is predicted to grow at a slower rate of only around five percent. But, last week, the stock market flared up suddenly, breaking all previous records. The winning run of Sensex and Nifty continued for eight days. In just four sessions, Sensex surged over 2,000 points. However, before the weekend, Nifty dropped 165.50 points and Sensex lost 505 points as some punters were quick to selectively sell part of their stocks to book profit.
On January 24, this year, the 30-share BSE Sensex traded over 1,800 points down at 59,108 against the previous 60,978.75 mark. Likewise, the 50-share NSE Nifty index retreated more than 550 points to 17,566 from 18,118. Dalal Street once again witnessed market mayhem on March 13 as Nifty sank to its lowest level in 2023. Last week, the market sentiments suddenly reversed. The Sensex logged a lifetime high of over 65,600 intraday on July 4. Of course, the share price movements had little to do with physical performance of those listed Sensex and Nifty companies. Suffice it to say that their corporate financial performance or earnings per share (EPS) for 2022-23 and future business prospects had nothing to do with the market volatility in terms of their prices or profit-earning (P/E) ratios.
In effect, the stock market volatility is unsettling the country’s economy, putting Indian Rupee (INR) continuously under pressure. Interestingly, the Reserve Bank, the government and the Securities and Exchange Board of India (Sebi) have been acting mostly as mute spectators. The stock trade is practically controlled by FPIs, the largest non-promoter shareholders in the Indian market. Their investment or disinvestment decisions have a huge bearing on the stock prices and overall direction of the market.
As on March 31, 2022, the FPI holding in NSE listed companies stood at as much as Rs.51.99 lakh crore. The US accounts for a major chunk of FPIs, followed by Mauritius, Singapore and Luxembourg, according to data available with the National Securities Depository Limited (NSDL). The FPIs hold sizable stakes in India’s private banks, information technology companies and big caps such as Reliance Industries (RIL). Not all these sectors are performing too well. Yet, last Thursday, FPIs’ net investment in the Indian market was Rs.2,641.05 crore that helped pep up the market to a record high.
For instance, India’s IT services sector, a global leader, is expected to report modest numbers in the upcoming corporate financial results season. Weaker discretionary spending, delays in decision-making, and weakness in sectors like mortgage, retail and telecom are expected to keep revenues down in the April-June quarter of the current financial year. HDFC Securities estimated the IT sector’s growth to moderate to five percent in 2023-24. India’s industrial production growth rate slipped to five-month low of 1.1 percent in March from 5.8 percent in February 2023, mainly due to poor performance of power and manufacturing sectors, showed government data. The previous lowest level of growth was recorded in October 2022 at a contraction of 4.1 per cent.
Globally, stock market indices are evaluated on two parameters — returns and risk. The most volatile indices in the US markets are the diversified Russell 2000 and NASDAQ 100. In the European region, DAX 30 of Germany and AEX Index are among the most volatile. The AEX index of Amsterdam contains the 25 largest tradable companies listed on Euronext Amsterdam in terms of free float market capitalisation. In the Asia Pacific region, the NSE’s Nifty is the most sensitive with over 100 percent volatility. The NSE’s Nifty volatility is followed by the Chinese index (SSE) and Japan’s Nikkei Index. The BSE’s Sensex too is equally volatile. In fact, Indian indices rank in the sweepstakes as the most volatile. Ideally, fundamental factors should drive stock prices based on a company’s earnings and profitability from producing and selling goods and services. Unfortunately, this is not quite happening in India as in several other highly volatile markets in developed economies.
High and frequent market volatility confuses foreign direct investors (FDI) about the economic growth prospects and long-term investment stability, especially in an emerging economy. It certainly brings a negative impact on the exchange rate of the domestic currency. The Reserve Bank may agree that INR has been the worst victim of frequent market volatility with millions of US Dollars in the form of ‘hot money’ rushing in and out of the central bank’s foreign exchange coffers in quick intervals, impacting the currency in circulation. In a more stabilised economy, when a domestic equity market rises, confidence in that specific country grows as well, leading to larger inflow of funds from foreign investors. This tends to create a demand for the domestic currency, causing it to rally against other foreign currencies. Unfortunately, the trend is reversed in India. The average exchange rate of US$1 in 2014 was equivalent to Rs. 60.9994. It has been going down steadily. Last week, a US$ went for Rs.83.61. One of the reasons behind the continuous decline of the value of INR is the unpredictable role of ‘hot money’ in the country’s secondary market.
Foreign exchange and stocks are the world’s two most traded financial markets. There exists a correlation between the two markets. A generally bullish stock market is expected to influence economic policy makers to raise interest rates. The central bank must use the interest rate mechanism at least to partly check violent stock price movements. The frequent stock price volatility in India is harming the market, confidence of genuine investors, exchange value of Rupee and the economy. (IPA Service)
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