Making Sense of Sensex

Indian investors, in recent years, have mostly gained during the one month preceding the budget. This year, however, could be different. The market sentiment on the eve of the budget is uncertain, if not nervous. The BSE Sensex has lost 1431 points (8 per cent) since January 14.

Published: Mon 15 Feb 2010, 11:05 PM

Last updated: Mon 6 Apr 2015, 10:19 AM

This nervousness comes against the backdrop of lot of positive news about the health of the economy. Latest official estimate place GDP growth in 2009-10 at 7.2 per cent, compared with 6.7 per cent last year. Industrial production rose by a sturdy 16.8 per cent in December. On external front, merchandise exports were up 11.5 per cent in January. Total exports for 2009-10 is expected to be $165-170 billion, almost unchanged from $168.9 billion in 2008-09.

Such a stream of positive economic data pointing to accelerating economic growth would, in ordinary times, have warmed the cockles of stock markets. The current times, alas, are far from ordinary. Every signal of a strong recovery simultaneously makes louder the calls for rolling back fiscal stimulus by raising duties and further monetary action to prevent overheating.

Businessmen and investors are viewing the approaching B-day (February 26) with trepidation and apprehension. No major relief is expected from the budget. The only issue seems to be how far and how fast the finance minister will go in winding up the stimulus package by hiking duties.

The stock market worries, however, extend beyond the budget. For one, a potential hike in interest rates seems to have dampened sentiments. The Reserve Bank of India has already signaled the end of easy money policy and it is only a matter of time before it starts raising interest rates to dampen inflationary expectations. Indeed, the two largest banks in India, State Bank of India and the ICICI Bank have indicated a possible rise in interest rates any time from April. Indian markets are gradually factoring in the risk of tighter monetary policy.

Second, concerns remain on the profitability of companies in the coming quarters because of the steep hike in commodity prices, which are now building pressure on operating margins of companies. Oil prices seem to have made a new bottom at $70 a barrel. Stocks of metal, auto and consumer goods have taken a beating at the bourses.

Besides local concerns, global cues also played a part in the slide of the markets. Global trade continues to shrink and job recovery is missing in advanced economies. Japan has slipped into deflation. In Europe, Greece is on the verge of default and three more countries in Europe—Portugal, Spain and Italy— are suspected to be in similar trouble.

Policy changes around the world have spooked investors. China is tightening bank credit to cool down its overheated economy. US President Barack Obama wants to regulate bank funds flowing into risky assets including stocks. Brazil’s fiscal stimulus is being phased out.

All this has hit investor sentiment, not only in India but also abroad. Stock markets are down, commodity prices have dropped and volatility is up. Optimism about a “V”-shaped recovery is being replaced with pessimism about a double-dip recession.

However, Mr Mukherjee’s budget could still boost the market sentiment if it contains proposals that confirm the government’s seriousness about pushing forward economic reforms.