There is good and bad news regarding the latest slump in stockmarkets that have seen a correction of around three per cent. A further seven per cent correction is expected in coming weeks. This was not unexpected as the markets had been irrationally exuberant since January, and went up 21 per cent till the correction set in. There was nothing in the economy, that was on a slow growth path, to justify this reckless upward movement. It had gone up in the hope that Narendra Modi would win on his promise of development for all. That happened, and the exuberance went on after his victory. This hope was also shared by foreign institutional investors (FIIs), who were flush with funds due to huge liquidity created by the stimulus programme continuing despite the nominal cut every month under the quantitative easing programme of the US Federal Reserve. The FIIs pumped in Rs 71,409 crore in just seven months, compared to Rs 1.3 lakh crore they invested in 2013.
On Thursday and Friday, the FIIs dumped stocks worth Rs 2,673 crore on the bourses in the expectation that the US would hike interest rates. This led to Indian markets going into a tailspin. Though this selloff figure is measly compared to the money the FIIs pumped in, the Indian markets, being shallow, are unable to digest huge such selloffs.
Besides, speculators and those who were buying heavily on the Modi factor saw this withdrawal by FIIs as an opportunity to offload stocks. The markets see some of their hopes taking a breather as the reforms they expected have not materialised. Market sentiments turn positive or negative overnight, but reforms can’t happen overnight. The ground realities are different. The Indian markets had also ignored the problems building up in the Ukraine, Gaza and now Argentina. So it has been hit by a double whammy.
But if the current slump in the markets continues, it is a great opportunity to buy strong stocks for those who missed the party. There are green shoots in the offing, like auto sales picking up and manufacturing figures showing a 17-month high. If these can be sustained for the next few months, then one can really say that the economy is turning round.
What is disappointing is that the Modi government, that should have hit the ground running, has not done so. It’s in its own interest to get the economy going as it has placed huge hopes on disinvestment. That cannot succeed unless the economy sees more substantial signs of growth.
