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For the record

May 22, 2004

It was a week of records for the Indian bourses! Of course, it is a different thing that nobody would want to talk about these ever. The stock markets continued their southward movement this week despite the nerve-wrecking 10% fall that was witnessed last week. Weak sentiments prevailed throughout, which saw the indices close in the red with the BSE-Sensex and the NSE-Nifty losing 2.1% and 1.4% respectively. But, this is merely a 'Cinderella' end to a weeklong anguish that prevailed on Dalal Street.

Last week's mayhem continued on the bourses this week with the first trading day (May 17) having gone down in history as 'Black Monday'! The indices, on that day, witnessed the biggest ever intra-day fall. The markets opened on a weak footing and sooner than one could have imagined, panic set in as they plunged on account of across the board selling. Within 20 minutes of start of trade on Monday, both the indices had crashed over 10% and trading was halted for one hour as the 'first' circuit breaker was triggered. This was for the first time in Indian stock market history that a circuit breaker was applied on the exchanges to control further damage.

The carnage, however, was not over. No sooner did the trading begin after the one hour cool off period, it was again halted, this time for two hours. The second circuit breaker had been triggered as the indices had tumbled over 15%! It was absolute chaos on the bourses and the sell off was being blamed at the uncertainty with respect to the continuity of reforms owing to the new government at the Centre. Representatives of the incoming government tried their best at reining the market fall by assuring and re-assuring that the reforms would continue.

Key gainers over the week (NSE-50)
COMPANY Price on
May 14 (Rs)
Price on
May 21 (Rs)
H/L (Rs)
BSE-SENSEX 5,070 4,962 -2.1% 6,250 / 3,033
S&P CNX NIFTY 1,582 1,560 -1.4% 2,015 / 960
TISCO 289 329 13.6% 490 / 141
TATA TEA 314 348 10.9% 420 / 190
TATA CHEMICALS 118 129 9.8% 189 / 66
MTNL 116 126 9.1% 166 / 92
MARUTI 427 463 8.4% 602 / 156

While selling by hedge funds and unwinding of positions by Foreign Institutional Investors (FIIs) seemed to be the key reason for the fall, Securities and Exchange Board of India (SEBI) numbers painted a different picture. While data of hedge funds activity is not available, FIIs were net sellers merely to the tune of Rs 636 m (see chart above). Even the domestic mutual funds (MFs) could not have effected such a massive fall as they had purchased equity worth over Rs 3 bn on that ill-fated day. Thus, the primary culprits causing the fall are not yet known. Rumours of NSE making margin sales have also been put to rest with the exchange having made a statement denying the same. Though SEBI has initiated an enquiry into this, the report is still awaited.

Key losers over the week (NSE-50)
COMPANY Price on
May 14 (Rs)
Price on
May 21 (Rs)
H/L (Rs)
REL. ENERGY 647 522 -19.4% 818 / 214
VSNL 142 128 -9.8% 210 / 80
BHEL 502 453 -9.7% 685 / 220
GLAXO 642 580 -9.6% 709 / 342
TATA POWER 323 293 -9.2% 450 / 127

However, Tuesday was a different day altogether as the indices opened firm on the back of bargain hunting at lower levels, taking advantage of the irrational behaviour displayed by the markets the previous day. News of Sonia Gandhi backing out from the post of the Prime Minister and Dr. Manmohan Singh, who is acclaimed as the 'architect' of Indian reforms, tipped to be the PM enthused market participants. Exuberance was witnessed on the bourses as value buying saw the indices record one of the biggest gains of over 8%. The buying continued well into Wednesday as re-assurances from the new government kept trickling in with respect to the continuation of reforms. However, Thursday and the first-half of trading on Friday saw investors take some money off the table, before some late buying on the final trading day of the week saw the indices turn positive.

With the dreadful week behind us now, it is important for investors to understand that what has caused this weakness on the bourses. Why has suddenly the India shining story lost its glow? Is it only the uncertainty with respect to reforms that has caused this turmoil in the Indian stock markets or is there something more that is being over-looked? It must be noted that markets across Asia had tumbled in the region of about 9%-10% within a span of a couple of weeks before some stability set in during the last couple of trading sessions. FIIs have pulled out money across emerging markets with estimates ranging around US$ 5 bn in the month of May alone. Indian markets have witnessed a net FII outflow of approximately US$ 700 m in the current month.

While there is a common belief amongst investors that it is primarily the political factor that has led to the fall, we believe that it is not just politics. We would like to conclude this weekly roundup here with an extract from one of our previous articles, "There are several other factors playing very important roles in determining the pace of global economic growth and, consequently, returns for investors in equities. However, while factors like political uncertainty are more likely to have a medium-term effect, others like terrorism and interest rate rise are likely to have long-term bearing. In that case, a staggered and a long-term strategy is most likely to be successful in providing investors with adequate returns on their investment. However, in these times of high levels of political uncertainty, we advise investors to practice a wait and watch policy and do not fall prey to the overall chaos." Happy Investing!

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