Let me start with a confession. I
have no clue about why stock prices rise or fall,
especially in India. I have never dabbled in the
market by buying or selling individual stocks. The
only occasion when I listened to my banker’s advice
to put some of my savings into three mutual funds, I
lost approximately 15 per cent of my capital before
capitulating. To promise myself never again.
Having made my confession, I ask you to look
carefully at the chart, which plots the adjusted
closing value of the BSE Sensex from 30 December
2011, the last trading day of the previous year, to
29 June 2012. As you can see, there are three
distinct segments of the roller-coaster ride:
1. Phase A, from 30 December 2011 to 21 February
2012. During this period the Sensex climbed by 19.2
per cent, from 15,455 to 18,429 points.
2. Phase B, from 21 February 2012 to 1 June 2012,
when the Sensex slumped by 13.4 per cent to 15,965.
3. Phase C, which is from 1 June 2012 up to 29 June
2012, where the Sensex has again started climbing,
and has risen by 9.2 per cent to touch 17,430
points.
My dumb questions are these: What is it that the
punters saw in India and Indian stocks that led to
the 19.2 per cent upswing in Phase A? And what is it
that they are seeing now which is resulting in the
making of another bull run?
There was nothing of note between 30 December 2011
and 21 February 2012 to nurture any bullishness. In
the four quarters preceding January-March 2012, GDP
growth had come down from 9.2 per cent to 8 per cent
to 6.7 per cent and then 6.1 per cent. Wholesale
price inflation was at around 7 per cent and tending
to rise. The growth rate of the index of industrial
production was shrinking across almost all
categories — with some sectors contracting in
absolute terms. Oil prices were running at around
$120 per barrel and taking the mickey out of the
central government’s oil and fertiliser subsidies.
Any reasonable person would have known that the
fiscal deficit was set to soar to stratospheric
levels for the third consecutive year. There was no
chance of the Reserve Bank of India being
accommodative by reducing the repo and reverse repo
rates. Most companies were showing lower growth of
the top line; an inflated middle; and a fall in
profit margins. And there was no economic or
political governance worth the name.
That’s what it was like during the period leading up
Phase A. Moreover, the story from the Euro Zone was
getting from bad to worse. Yet, the punters and
foreign institutional investors alike behaved as if
India was ready for another stock market boom.
So, too, this time around, i.e. Phase C. What has
happened in the last month to justify this spurt?
That the second Greek election of 17 June 2012 did
not lead to Alexis Tsipiras of the Syriza Party
winning enough votes to form the government? Or that
Pranab Mukherjee has been shunted upstairs and that
Manmohan Singh has taken additional charge of the
Ministry of Finance? Or a feeling that after a GDP
growth of 5.3 per cent in January-March 2012, things
can’t get any worse?
To me, this looks like irrational exuberance. The
Euro Zone remains is very deep trouble. Greece still
has to repay large debts, and is far from reformed.
Germany refuses to budge an inch from the ‘Cut your
coat according to your cloth’ hectoring that is the
leitmotif of Angela Merkel. Manmohan Singh and his
chosen few may have returned to economic headlines,
but have done little yet to create good time
feelings.
What has changed for the better? Has the RBI become
more willing to cut rates? Are we seeing greater
investment impetus, however small? Is inflation
moving to a steady state of 5-6 per cent? Is there
any clear sign of cutting the fiscal deficit? Who is
saying, “Times up. Now let’s move it”? None that I
know of. So, why this spurt? To create another fall?
I’m just a dumb economist. Stock prices are beyond
my pale.
Published: Business World, July
2012
