All is not right

Mumbai: A year of scams — that's how one can describe 2003. Telgi, cricket and CAT… to name a few. As far as the Indian stock markets are concerned, one cannot predict what is going to happen, but there will be many who might burn their fingers when the frenzy ends.

In the middle of the year we saw stocks belonging to the Indian banking sector rising in a very puzzling manner and artificial interests were being generated around these stocks. Chairmen of banks, who should devote their energies towards old-fashioned borrowing and lending, suddenly started getting market savvy and were spouting words like price to earnings ratios, market capitalisation and valuations.

Mutual fund managers and brokers, never the ones to miss a trick when they see one, tossed up power presentations convincing the chairmen of banks that their stocks were grossly undervalued — 'vultures when they should look like peacocks'. To make the peacocks' feathers shine further, mutual fund managers and brokers advised the chairmen that their banks should return the equity that the government had given them earlier.

With this, the banks' equity capital base will fall and consequently the price earnings ratio will rise — a simple class three arithmetical paper entry. The chairmen fell for it and bank stocks zoomed till the government announced that it will not accept the equity, which the banks wanted to return. A mini mayhem ensued; banks' stock prices fell and there was blood out there in the markets.

That was sometime in mid-2003 when the Sensex was at a level of 3400. The speculation at that time was that the Sensex could breach the 4000-level mark by the end of the year. Today, the Sensex has crossed the 5000-level mark and is still rising. The talk is that the 6000-mark could be reached any day. What is causing the Sensex to rise? What should cause the Sensex to rise?

To answer the second question first, it is the economy, the fundamentals of the companies and honest brokers that cause the markets to rise. Whether that is happening or not is more than a $6,000 question which will only be answered depending on whether there will be blood out there in the markets sometime later.

To be fair, the Indian economy has been looking good and the prospects for the future, looks even better. The Indian economy is no longer in the traps of the 'Hindu growth rate' and the gross domestic product (GDP) is growing at 7 per cent and may grow at a higher rate next year.

Manufacturing, which was in a doldrums sometime back, is back with a vengeance, ready to take on the world like information technology, business process outsourcing, pharmaceutical and other sectors. The banking sector is cleaning up the non-performing assets act and going for technology to make it lean and mean. As the government said that from the 'feel-good' factor, we are transcending to the 'do-good' factor.

India's foreign exchange reserves will soon cross the $100-billion level, which makes India look like a stable market for foreign institutional investment (FII) and foreign direct investment. India's huge fiscal deficit is a problem, but recently the government once again started taking initiatives for disinvestment, which will bring the much-needed monies to wipe out the fiscal deficit.

Macro factors apart, companies have also indulged in cost cutting and taking initiatives for improving their performances, which make their stocks look attractive.

The one reason why the Sensex is galloping is that FIIs have bought the India story in a big way and they are pouring in billions to the stock market. FII money could be fickle. Like water, which seeks its own level, money seeks its own market. Money flows to where the return is the highest and if the FIIs see a better opportunity elsewhere they will say good bye. However, judging by the markets in other countries, India appears to be the best emerging market story and will tend to remain so.

Some of the funds that have found their way through the FII route are moneys routed through overseas corporate bodies (OCBs). This is Indian monies that went to the OCBs and are now back legally through the FIIs. Finance Minister Jaswant Singh, however, has assured Parliament that this is only 20 per cent that has come and the rest of the funds are 'secular' — meaning 'Sab theek thak hai.'

The ruling government has a vested interest in the 'Sab theek hai' position. Elections are round the corner and a buoyant stock market helps. We can only pray that after elections, apart from political blood, no investor blood is shed.