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Stock markets: Going nowhere

Aug 16, 2000

Political instability, threat of aggression, slowing industrial output, weakening currency and higher fuel prices. Reading this one can be forgiven for being pessimistic about the prospects of the Indian stock markets. Our 54th year of independence has surely started on a weak note. Let’s first go through the hurdles that a buoyant stock market is facing. The Kashmir issue has once again come to the fore and this time the threat of aggression is for real. Statements made by the Pakistani despot have only aggravated the situation. After having grown robustly towards the end of the last fiscal year, growth in industrial output has slowed considerably. A part of this could be attributed to a severe drought in several states. Further, business confidence has been eroded after the rise in interest rates. This will hit the already sluggish investment activity. Finally, with crude prices rising unabatedly (they recently hit a 10 year high), domestic fuel prices need to be revised upwards. This will increase costs and in an environment where demand is still not robust, this could hit producer margins.

All these factors (and more) have contributed to a state of pessimism in the stock markets. Foreign investors and domestic institutions have been averse to committing fresh funds. Mutual funds too have been relatively inactive. The markets as a result have been unable to hold onto any gains. This scenario is likely to persist in coming weeks.

But why aren’t the markets reacting sharply to the stream of pessimistic news? That's because the Indian economy is fundamentally sounder than it ever was ever since it entered the slowdown in FY97. Forex reserves have risen sharply (they have declined in recent months owing to RBI's measures to support the Rupee) and so has the growth in exports. The current account deficit seems to be well under control. The fiscal situation too is better and, on the inflation front, the worst seems to be over. Investment activity in the infrastructure sector is finally showing signs of buoyancy even as policy initiatives of the government to step up the reform process benefit the economy.

So what we have is a mixed bag of news. The markets probably would not run up or down unless the situation becomes clearer. What we are likely to see is a market that, in market jargon, is ‘range bound’.

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