The Hindu Business Line : Fundamentals win over sentiment

During the past 10 days, the stock market has been witnessing a steep fall for which a whole lot of reasons have been attributed. According to some, the internal mechanics of the Indian market, such as the payments system, are more to blame than, say, systemic characteristics and what is known as the fundamental position of the economy. In other words, it is being argued that till Thursday the market will be unstable and on the downswing because that day is settlement day in the futures and options segment where, incidentally, huge positions have been built up which are now being liquidated. Put more simply, resources are required for this operation, which are currently being mobilised from the market.

This, according to the particular school of thought, is the setting in which the crash began working itself out since early last week. But last week was quite far away from this Thursday, so why did the market tremors begin at that early stage — specially when the Sensex crossed the 12,500 mark just a few days earlier, on May 10?

Circular to blame?

It has been suggested that had it not been for a CBDT draft circular posted on the net in the week beginning May 14, perhaps nothing much would have happened. That circular dropped hints that the taxman would come down firmly on traders whose income would be categorised as business income and taxed accordingly instead of being lumped with those earning income under the capital gains head.

Importantly, it was felt that the FIIs could possibly be brought under the scanner in this regard, the inference being that their tax liability could also go up in tandem with that of the traders.

Not surprisingly, the market — already in a taut state because of the impending payments deadline (the upcoming last Thursday of the month, etc) — took fright and began reacting in the only way it was expected to in the circumstances, namely, shed value.

Rubicon crossed

The pressure to sell was on, a trend that was not only fuelled by the impending Futures and Options settlement date coming up for an over-extended market and untimely official draft circulars, but also by irresponsible statements made by certain politicians. When all this resulted in the 826-point fall last Thursday, it was safe to say that the Rubicon of sensibility and circumspection on the stock market had been crossed with the future being totally uncertain.

The 457-point drop on Monday after a free-fall of 1,100 points during the day is, among other things, evidence of the underlying systemic strength of the Indian stock market.

True, the settlement on Thursday is yet to come, but this is where the expectations flowing from the strong fundamentals of the economy have intervened as also the systemic strength of the economy's overall financial structure, in the absence of which it is just possible that the country would have been faced with a full-blown financial crisis.

Ranabir Ray Choudhury

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