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Stock markets: Reason over impulse... - Views on News from Equitymaster
 
 
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  • Oct 12, 2000

    Stock markets: Reason over impulse...

    Yesterday was probably one of the worst days for the market in recent months. Not due to the fall but because of the psychological fear that the markets were going to go into a free fall.

    Early into the trading hours, the markets panicked on Wednesday. The reason was the intense selling pressure in the markets even as buying support was absent. The factors contributing to this was primarily the fall in the NASDAQ. Extending this a little further, yesterday's decline in the NASDAQ could once again trigger selling on the domestic bourses today. This correlation is probably right, since a large part of the gains in the first place were drawn from the NASDAQ.

    However, as always, the markets have overplayed the situation. Just to give an instance, a leading business channel the other day aired a view that the trade deficit would be over US$ 8 bn, and made it sound as if it was a big thing. The new spread like wild fire, adding to the bearish sentiment. But, may we ask, how much is US$ 8 bn? Or better still, where were the doomsayers when between April - June, the average trade deficit per month was US$ 1 bn, which would, if simply extrapolated, amount to a deficit of US$ 12 bn. The trade deficit of US$ 8 bn stands at a manageable 1.5% of GDP. Further, when one looks at the current account deficit, the situation is much better as earnings from India's promising software sector are factored in.

  • Dr Y V Reddy, Deputy Governor, Reserve Bank of India on the Indian Economy

  • Read more on the Indian Economy

    What do the fundamentals say?

    We agree that over 60% of India's population would be affected by the slowdown in projected agricultural growth. However, and we do not have figures to support this though, after twelve successful monsoons rural India is a much more wealthier place. A slowdown in growth will affect consumption, not put an end to it! And agriculture, unlike in earlier decades, now accounts for only a quarter of our national output. Therefore the impact is anyway limited.

    The Indian industry, which accounts for another quarter of the national output, too has suffered a slowdown. Not if you ask DR Y V Reddy, Deputy Governor, RBI. In an interview with Equitymaster.com, DR Reddy clearly stated that the growth in bank credit was on anticipated trajectory and almost definitely the full year targets will be met. He was of the opinion that this is more of a short-term development, and should not be termed as a slowdown (he termed slow down as a "bold" word). So, even if the numbers do not indicate it, the underlying factors support the view that the industrial sector is humming with activity. The fact that exports (excluding services) have grown by 25% in the first quarter supports this view.

    Finally, let's look at the other half of the economy - the services sector. Even after a much publicized downgrading of the growth prospects for the Indian economy for FY01, the CMIE still projects the services sector to grow by over 8%. Now that's what we would term as momentum. And that's where solace should be drawn from. The India economy, despite hiccups, continues to grow robustly. And among the larger economies in the world, it is one of the fastest growing.

    Coming to the markets, there is talk of the oil prices affecting consumption and profits. But, and we are sure you will agree, oil prices have been rising for over a year and a half now. Did the markets miss this development? Probably not, as they were then participating in the TMT rally. So now it is all coming back to haunt them. And in a proportion that is much greater than it actually was (remember the oil prices have already retreated by over 20% from their recent highs).

    But then as Paul Krugman, a noted economist once said, "it's just one of the things the markets do now and then; and it, too, shall pass".

     

     

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