The Hindu Business Line : Market is no real guide

COMPARED TO THE stock market, the currency segment has remained subdued this election season. Whereas the share prices fluctuated, often violently, in response to the exit polls after each round of polling, the rupee-dollar exchange rate — the most discussed market parameter in recent times — remained quiet. Perhaps this has to do with varying perceptions. Stock prices have as a rule been more `visible' to lay people. Policy-makers everywhere tend to interpret in a bull market a vindication of their economic management. Not surprisingly, the stock market recovery of this year — the Sensex went past 6,000 on a few occasions — has become one of the important publicity points for the ruling coalition, often projected ahead of even the rebound in the GDP growth. The other big stock market related success story of the year — the divestment in six public sector units — further reinforced the image of a successful economic management.

But the danger of over-relying on something so ephemeral as stock prices is already in evidence. While investors might, quite rightly, be hoping for political stability above all, the gyrations in the share prices after each exit poll have been interpreted rather narrowly, that is, only in terms of the NDA's prospects of return to power. It may well be that the ruling coalition is best placed to form a stable government, but to infer from the share price swings (after the exit polls) that no other combination of parties will deliver equally well seems far fetched. In any case the market's positive mood seems dependent on a continuation of `pro-market' policies, such as an accelerated public sector sale programme. Again, it may be tenuous to conclude, from the share price movements, that other political formations will necessarily be opposed to those policies. In fact, the election time stock market behaviour ought be seen as further proof that the market mechanism is far from perfect. In the past it has proved inadequate either for testing or gauging important macroeconomic policies, including the Budget.

Fortunately, no similar profound meanings have been read into the rupee's movements against the dollar. While the appreciating rupee did become a positive point for the ruling party early on, for a variety of reasons exchange equations seem to have slipped from political consciousness at the time of elections. For one, the rupee's ascendance over the dollar has been gradual, moving from Rs 45.61 on January 1 to below Rs 45 on March 23. Though in the last week of March the rupee strengthened spectacularly to touch Rs 43.39, it has since been on a gradual decline closing at Rs 44.70 last week. Since outside factors — the economic situation in the US and the Euro Zone, for instance — influence currency rates to a great extent, it is perhaps pointless to tie down explanations in India to exit poll verdicts. Finally, there is a realisation that an appreciating rupee is no unmixed blessing in economic terms; it penalises export effort, for instance. Either during elections or in normal times it is best to view the financial markets with equanimity.

More Stories on : Editorial | Financial Markets

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Market is no real guide

All's not well on the farm front

US economy: Contradictory signals

Doomed or still recoverable?

Coalitions and economic stability — The great disconnect

Cooperative banks

Malaysian palm oil exports to EU: The currency effect

Empowerment of women: Emerging opportunities and potential threats

Electoral reforms

Civil services