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JAYANTA MALLICK

Domestic players would find it difficult to recover financially in near term

BARE TREE: A tree shedding its leaves outside the Bombay Stock Exchange reflecting the depressed mood at Dalal Street. - Paul Noronha

It may not be way off the mark to assume that there is a campaign to fool Dalal Street investors. If the local stock market slumped last Thursday because of the "uninformed reports", put out by a news agency, and taken cognisance of by the market, then it should bounce back with vengeance on Monday onwards following clarity on the all supposed concerns - applicability of higher tax on FIIs and the Left's proposal on the return of long-term capital gains tax and review of the Mauritius tax avoidance treaty. But this is unlikely to happen.

The Street has not yet left the debilitating weakness behind. The over-leveraged trading cult that has thrived in the last few months is likely to extend its toll further this week. The run-up to the expiry of May derivatives contracts on Thursday also may force another stomach-wrenching experience.

The market is likely to take time to recoup as the cumulative loss, for a large number of players, is deep. Many of the domestic players would, either find it difficult to recover financially in the near term or may be disallowed to overstretch their limits.

Systemic inadequacies in detecting violations in margin funding norms, prescribed by the SEBI, may take time too to plug. The role of some NBFCs, who are governed by the RBI, in financing leveraged positions beyond the prudential guidelines may also come to the fore in the coming weeks.

This time it is the punters - small, big and medium - who had overshot many times their risk taking capacity. After the 2001 scam, the exchanges have been protected in terms of risk management. But, the market players still remain vulnerable to speculative overdrive.

Apart from lack of a well-coordinated and healthy margin and lending mechanism, need for removing cash settlement in the futures and options was also felt last week. The absence of physical delivery in the derivatives accentuated a one-way movement in the overall system. This is also likely to delay return of the balance in the market.

Volatile air

All emerging markets, particularly the Asian stock markets, witnessed a highly volatile week after global investors pulled out money. MSCI's principal emerging markets index dropped more than 10 per cent from its multi-year high on May 10.

But the Indian market benchmark lost 12.41 per cent since it closed at a peak of 12,612 points on May 10.

Unlike majority of the emerging economies, Indian economy does not heavily depend on the US market for exports and its overall growth. So, the growing apprehensions over further hike in the US interest rates, creeping inflationary pressure, fuelled largely by overspending, as also high crude price regime, and an eventual return to economic slowdown, should have impacted Indian equities in a relatively milder way.

In fact, the Indian market had been fetching a premium to the region for quite some time simply because of its "uniqueness among the emerging markets". Robust flow from overseas fund did help lift the Sensex 35 per cent this year until the previous week.

FII profit-taking

If the Indian growth story is intact, and at 21-plus times the benchmark earning, equity valuations were "compelling", why did the FII profit-taking emerge?

The reason, admit many foreign fund managers, is very simple - it is perfectly legitimate action expected of them in a time of relative uncertainty. India was, and still is, more attractive than China, Russia and Brazil, at least for global portfolio investors, insist almost every overseas fund manager.

Their perception of the "Indian opportunity" at comparatively lower level now is likely to provide the supports in the next few weeks on the key indices.

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