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Settlement cycles villain of peace - Views on News from Equitymaster
 
 
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  • Apr 5, 2000

    Settlement cycles villain of peace

    The domestic stock markets have suffered one of their worst declines in recent times. The BSE Sensitive Index (BSE Sensex) declined by 7.2% or about 360 points. Most stocks ended the day at the lower circuit 1,900 hundred of them by one estimate. But, is there reason to be worried. Maybe. Maybe not.

    The graph above surely does make the situation look grim. Some solace can however be drawn from the fact that foreign investors were net buyers (!) even as markets crashed. In fact they have invested over a billion dollars in domestic markets over the last two months. That there have been excesses in certain stocks cannot be denied. But whether that justified the sharp fall that the indices suffered is another matter.

    The Indian markets had a sharp run up last year. The rationale for the surge was, broadly speaking, a pick up in domestic economic activity and the probability of fresh economic reforms (opening up of insurance sector among others). Has the scenario changed to warrant such a correction? Certainly not.

    The crash on the Indian bourses can be partly attributed to one technical factor. In India a large number of momentum investors have been carrying positions without paying margin money. This is done by shifting positions from one exchange to the other (both the BSE and NSE have different trading cycles). Yesterday happened to be one such day when trades were to be shifted from one exchange to another. In view of the decline on the NASDAQ, investors rushed to close their positions. As a number of stocks hit the lower circuit investors were unable to do so. This created panic and selling spread to other stocks. The result an across the board selling spree.

    Will such a trend continue? Watch out for Friday another day when positions are to be shifted!

     

     

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