Bully for the Bull

Bully for the Bull

In the preceding trading week and the last hour of trade on Friday the 18th, we witnessed the destabilising spectacle of a bungee-jumping Sensex, Nifty, Midcap, Smallcap and indeed every single sector index on the Indian Stock Market.

Amongst the consternation this spectacle wrought, we could only console ourselves by remembering that plunges and recoveries of this sort have happened before. But, each time it happens, it is occasioned, to a lesser or greater extent, by the inept actions of an over cautious government quite clueless about the impact of their nostrums on market “sentiment”.

This time, it was to do with an unreasonably tight credit policy as the steerage class of futures and options punters cried out for more margin money from brokers who couldn’t pony up because they were in turn refused further limits by banks because of the RBI guidelines. So, some poor wretches “drowned” in their financial puddles, victims of the kind of “collateral damage” that former US Defence Secretary Rumsfeld was fond of citing.

That this government is uncomfortable with the pronounced risk-taking abilities of traders and investors who live and breathe “greed and fear”, is self-evident. But the basic thing that our politicians and bureaucrats do not properly understand, is that a stock market works as much on fundamentals, liquidity and logic as it does on sentiment, and let it be plainly said – rank speculation.

It is speculation that feeds most heartily on sentiment, and no bourse worth its salt can call itself alive and well without it. To try and stamp out speculation in the bourses is like trying to stamp out sex in the bedroom. And any action that works to wilt this ineffable sentimental aspect tends to produce very strong adverse reactions. And this means in everyone, from the Colonel’s Lady to Judy O’ Grady: all those institutional players, mutual funds, insurance companies, the foreign institutional investors, the hedge funds and futures and options traders, the newly arrived sovereign funds -all these research driven big-hitters. But even these blue-chip organisations share an inordinate attachment to “sentiment” with the superstitious learn-on-the-job punters, well-advised high-net-worth individuals and those discreet but powerful private equity players.

But whenever, in recent times, our bourses have taken a grievous tumble, we have seen Finance Minister Chidambaram come out to reassure us on market “fundamentals” and our high “GDP growth” rates, using a tone of voice one might best use when addressing the mentally challenged. But, Mr. Chidambaram and the entire posse of politicians, bureaucrats and sarkari economists, stoutly refuse to acknowledge, out of some robust if inexplicable arrogance, that “fundamentals” do not, by themselves, determine the performance of stock markets.

Meanwhile, back at the ranch, and in the cities and towns of America, we are witness to a tremendous manifestation of change. We see a black man battling for the Democratic Party presidential nomination with a woman. In watching these two archetypes duking it out, breaking taboos like a Greek might break dinner plates, we are treated to something never seen before. But America has always been good at handling change, despite its more recalcitrant and reactionary elements.

This same America wants to acknowledge that India has arrived and is willing to give us time to adjust to the implications of our new found prominence. Perhaps then, there is a parallel here, between how India should be handling its economic emergence and the way America is contemplating the election of its first black or woman president.

In the December 2007 issue of The Atlantic, the cover story is on Barack Hussein Obama’s candidacy. In it, Andrew Sullivan writes, “Sometimes when the world is changing rapidly, the greater risk is caution”.

Today, Tuesday the 29th, of the week after, we are no longer plumbing the depths of the financial market abyss. But, if we have anyone to thank for this state of relative stability it is Ben Bernancke, the US Federal Reserve Bank Chairman. Because, it is Mr.Ben who turned the tide on the global market crash by cutting US interest rates by an unprecedented 75 basis points, from 4.25% to 3.5%, in the middle of last week.

It is true that Bernancke, like our own RBI Governor Reddy, has erred too much on the side of controlling inflation, to the point when the US bourses went into a free fall. But, still, we must be grateful because it is Mr. Ben’s 75 bps cut that saved the bacon of the Indian markets plunging at nearly 10% a day!

But have we learned anything from the US example? Not if you go by Governor Reddy’s monetary policy announced today. In it, he uses the inflation word ad nauseam to justify his standing-still on the cash reserve ratio (CRR) limits, the repo rate which stands at 7.75% as well as the reverse repo rates.

But, in the end, especially if Bernancke feels compelled to cut the US interest rate by another 50 bps tomorrow night, we might see a flood of foreign investment coming into India to take advantage of our “conservative” fiscal management and the great arbitrage opportunity. We could also see a surge in the indices from the money that will come back into the markets from the excess captured by the Reliance Power IPO and the large collections made from a host of new mutual fund offerings.

Governor Reddy, Mr. Chidambaram and Mr. Damodaran might have to come up with some new ways to strangle growth before the ink is dry after all.

(935 words)

By Gautam Mukherjee
Tuesday 29th January 2008

Also published in The Pioneer www.dailypioneer.com on the OP-ED Page on Wednesday 30th January, 2008