Reprieve for the confidence sensitive

Reprieve for the confidence sensitive



Tim Condon from ING Barings, recently revealed great insight about the Indian Stock Market, calling it, smack-dab, a “confidence sensitive market”. It sounds innocuous enough, like a type-written label - to a bottle of TNT; because there’s a hair trigger concealed in the cotton wool of the insight. Condon has put his finger, willy-nilly, on a profundity. But let’s see, Bhajji and Sreesanth will agree, certainly if they’re put under hypnosis. It’s self-evident after all, we Indians do tend to over react. And so, by implication, the FIIs trading in India should factor in this local characteristic, this natural excitability of temperament that makes us lurch around somewhat more than is necessary.

I suppose a touch of melodrama in Dalal Street is inevitable. We are what we watch. And Bollywood and its Southern equivalent couldn’t be themselves, if we didn’t like our emotions exaggerated. So overreacting to global cues is natural to us. We can be depended on to do this, and no amount of near double digit growth at home can assuage matters. But, it is also true that once we’ve wailed, wept, beat our breasts, separated, reunited, and lost trillions in market value; we will suddenly calm down and reinstate our natural optimism. A storm followed by the abrupt all clear is characteristic. Naturally, it catches out most market analysts. They flounder about, atop the contents of their laptops, desperately trying to apply international analytical models to this phenomenon. But what can they do: it’s science versus “confidence”, not to mention “sensitivity”.

The bipolarity is between “confidence” and “sensitivity”. So, no bad news goes down without vigorous lamentation. Conversely, no amount of CRR hikes, 42 month high levels of inflation; darkest pessimism from TV and print borne experts displaying impressive logic, can put a kink in our optimism. Of course, this time, for once, the Indian Government has played its part by showing policy sagacity by plumping for growth even as they set about fighting the inflation by monetary, supply-side and fiscal methods, working, one hopes, in concert.

But it is undeniable that RBI Governor Reddy definitely turned Indian Stock Market sentiment for the better. He provided a much needed domestic “trigger” by choosing not to raise the Repo and Reverse Repo rates on April 29th. This well received action was followed by the US Federal Reserve cutting interest rates by another 25 bps on April 30th taking it to a very attractive 2 per cent compared to our high by comparison 7.75 per cent! But, at least the RBI didn’t hike it to the widely expected level of 8.25 per cent.

Indian business and industry has been coping admirably with 7.75 per cent so far, refusing to go slow on its investment plans; but another 50 bps in the midst of high raw-material, input and energy costs, would probably have been the proverbial last straw.

US Fed Chairman Bernanke not only cut 25bps as expected, but pointedly left out his cautionary line, used every time he cut interest rates, this being the seventh time, about expecting continued challenges to US growth. This is a happy departure, because it has been taken to mean, in the arcane way central bankers indicate things, that the Fed thinks the tipping point for the revival of the US economy may have come.

There is evidence in America and elsewhere to support this idea. The commodity and oil prices are heading downwards. The US dollar is getting stronger. Job losses are moderating. Foreclosures are down. The Dow 30 Index has closed once again above the 13,000 mark.

Across the water, the United Kingdom is thinking of recommencing its lending programmes to revive the UK Housing Market. Down under, the Australian Stock Market is at its highest number for the year so far. Japan is doing very much better and announcing profits in some of its major corporations. China has retraced some 15 per cent of its 50 per cent fall after a 200 per cent rise. Brazil is having a distinctly good year. Let us wait and see how things go over the next few weeks in Germany and France

And in India, we are within sight of the 18,000 level on the Sensex, and above 5,200 on the Nifty once again. The majority of stock market commentators, both Indian and foreign are still reluctant to call this move up from 14,500 to near 18,000 on the Sensex, a resumption of the five year Bull Market. Even the renowned Bulls like Rakesh Jhunjhunwala and Ramesh Damani are Bearish as yet. They call the revival so far all sorts of things yet- a “relief rally”, a “bear market rally”- an adjustment to the “oversold” state of affairs and talk of a “cap” about to resist all attempts at a “breakout”.

But another school of thought thinks the local and global turn in the Wheel of Fortune happened that weekend, just a few weekends ago, when the much maligned US Government under G. Dubya Bush put together a USD 30 billion guarantee package, in less than 48 hours, to save Bear Stearns from collapse. US Treasury Secretary Paulson, ( previously CEO of a highly profitable Goldman Sachs), working in tandem with the Federal Reserve Bank Governor Bernanke, pulled it off. Like well-rehearsed precision dancers they underpinned the audacious J.P.Morgan Chase takeover of Bear Stearns. By this one impressive action, one of the five main pillars of Wall Steet was saved, and with it, so was the rest of the financial world globally.

So, maybe it is time we developed confidence amongst all our sensitivity. We might also do worse than recognise that what Condon said about the Indian Stock Market may well apply to the nation as well. The Economist, of April 12th, reviewed the report on Indian Financial Sector Reform submitted recently to the Planning Commission by Mr. Raghuram Rajan, an ethnic Indian, former Head of the IMF, and praised much about it. But the magazine didn’t expect very much to come of it, because in India: “regulators get blamed only for mishaps, not for lost growth and wasted opportunities.” Ours is a system that “prizes stability over vigour”. But maybe it’s beginning to dawn on us that without vigour what we achieve is a crisis of “confidence”. And that we can’t afford to condone.

(1,050 words)

Friday 2nd May, 2008
Gautam Mukherjee

Appeared in print and online as "No doubt we overreact" on the OP-ED Page of The Pioneer www.dailypioneer.com on May 7th, 2008