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A Dry Monsoon for Indian Markets? - Views on News from Equitymaster
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  • May 20, 1997

    A Dry Monsoon for Indian Markets?

    The fizz may be coming out of this bottle. Just as the stock markets looked like they were ready to sizzle along with the summer heat, our political babus my have punctured investors' enthusiasm to rush back into equities. While not signalling the start of a bear market that could take us back to the 3,000 level and below, circumstances and recent events suggest that the upside for the market is probably another 6% to 8% from here on towards a level of 4,000 to 4,100 over the next few months. Not bad, but definitely not in the same league as the 27% rise of the previous five month period from December 1996 to April 1997.

    While analysts will debate and argue that politics is divorced from economics and that the passing of the Chidambaram-Gowda budget by a Kesri-Gujral government is proof of that, it is important to put this argument in perspective. Sure, on a five year, ten year, and twenty year view the steps taken by various governments since 1980 suggest that economic liberalisation is here to stay, but one needs to remind oneself that markets move on the anticipation of the event and the speed of that eventuality. That is what has taken a beating. Because politics as controlled by politicians in white dhotis, white gandhi caps, and non-white money decide the issue of the pace of reforms.

    Put yourself back in recent history. It is December 1994 and the Congress government of Rao has to face an election by May 1996. What do they do? Well, they are worried about this inflation figure of 12% and the recent loss of the state elections was blamed squarely (and wrongly) on the issue of high prices. So, Mr Rao and Singh suggest to the Reserve Bank of India that the charter of the central bank is to protect the value of the currency (which it is) and that a little adjustment of the growth in money supply would help that ambition being achieved. So before you can say "drastic slowdown", the Reserve Bank reduces money supply dramatically and hikes interest rates to levels that cause industry to come to a shuddering halt. Less money and expensive money causes share prices to collapse.

    By April, 1996 the Congress is kicked out of power and when the dust settles, we have a Chidambaram-Gowda government which - in theory does not need to face the electorate for another five years. So what do they do? Well, over some masala tea and dosa, they probably tell the Reserve Bank that they want to see growth restored and it may be a good idea to throw some money back into the system to help the dying industrial activity. And guess what? Sure enough, the central bank shovels money back into the economy and activates a revival of the economy as interest rates collapse and confidence begins to be restored in the existence of rational thinking politicians. Between July 1996 and April 1997, interest rates have fallen by an average of 20% for most borrowers.

    Add to this combination of masala tea and dosa, some vadas and idlis in the form of a budget and you have a South Indian Delight that drives the BSE-30 Index northwards from its already northerly direction. Everything looks good and most of the pessimists are talking about a great bull run for Indian stocks in calendar 1997.

    Now look at what Kesri does. Probably because he forgot to buy shares in December 1996 (like most of the FIIs) and doesn't want to be left out of this bull run story, he pricks this growth story with a selfish pin and pfffft...the market corrects by 8% in one day. Sure, Kesri then talks to his colleagues in the Congress Party and they all agree with his actions (remember that fact when you vote in the next election) and then after wasting time for three weeks they agree to come back and save the UF (their own skins, actually) as long as the UF has a new leader and that is how we got Gujral. Do any of us even know which constituency he stood from? Or how much he won by? Oh, well, I guess an election is not the place where you have to decide these things.

    So, what is the link between today and December 1994? Think of the Gujral government as a caretaker government before the next election. And think of Kesri and the party he represents. They will stand in front of the mirror and ask: "Mirror, mirror on the wall, when should we let this government fall?". And the mirror, being a Congress mirror which hides the truth, will say: "When inflation is down, you will win votes." (If the mirror spoke the truth, you see, it would have to tell the Congress party to disband itself and admit that there is nothing that this collection of people can do for our country anymore. They gave us political freedom forty-nine years ago and economic bondage since then. But the mirror, being a Congress mirror, is a survivor and knows that truth does not get you survival. But back to the story.)

    And Kesri will go to the co-ordination committee and tell them to order some more masala tea and dosa but this time throw some cow milk in and, of course, don't forget to order the reduction in money supply and a hike in interest rates. Assuming that Kesri talks to his mirror today, we will back in election mode by September and when the next credit policy is announced, don't be surprised if the central bank is more cautious, less bold, and more stern.

    Add to this mixture of influence of politics over economics a few months of uncertainty about the monsoon, the extent of the recovery, the effect of the truck strike on industry, hesitancy in demand from urban India to spend now, and still slothy export markets and you have the case for, well, no great shakes in Dalal Street. In November 1996, we flagged the market as a buy largely because of the influence of politics over economics - Chidambaram and Gowda wanted to be known as the Growth Guys in India's history books.

    Kesri and the Congress want to be known as the Great Spoilers - the people who messed up India for forty nine unrecoverable years. Let's do them a favour and let them be a part of history. Remember the election symbols of all these candidates and make sure they lose their deposits in the next election! Meanwhile, retail investors will continue to deposit their money in the blue-chip institutions and banks at 12% to 16% rates of interest while foreign institutions would be wise to stay on the sidelines and nibble around value. A boring "Wait and Watch" strategy may not get the little upside that's left, but atleast you will not have a dry monsoon.



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