The Hindu Business Line : Political risk still looms large

The Left may be right, but the capital market valued its action by putting a discount on the indices last week. This week also Dalal Street is likely to continue to consider Left’s opposition to the Indo-US deal as a risk – an uncertainty, a fear of fall of the Government, a period policy drift and executive inaction, loss of growth momentum, maybe also a change in the economic course, and finally apprehension over flight of liquidity.

Whether the apprehension is real or imagined is immaterial in the short-term. As psychology plays a crucial role in determining money flow and, in turn, the price-discovery mechanism in the short run, imperfections often rule over cold logic; more so because, markets always tend to instinctively speculate on possible forward events with a myopic vision in the immediate term and readjusts at the time actual occurrence.

Perception paradox

Will an early election be a referendum on the deal? A section of the Left and the Right also the Centre would love to extend it to economic policies too. Some market analysts and the majority of the Left, paradoxically, think that stalling of the proposed implementation of the civil nuclear deal will have a long-term bearing on the economic fundamentals of the country.

If the Left views implementation would threaten economic sovereignty and place constraints on the country’s choices on trade and businesses, an emerging market perception is that it would throw up new opportunities for Indian business, employment and economy.

In the last trading week, Dalal Street has only priced in short-term perceived risks related to the deal. But for the market, the medium-term fear is much greater. Some investment strategists and analysts feel that if the deal is not carried through to the implementation stage and beyond, despite elections, it may cause medium to long-term loss of opportunities for the India Inc too.

However, perception of such an impact is highly speculative and tends to vary both in degree and content even within the market circles.

For the time being, the short-term investment tactic on Dalal Street is likely to remain broadly news-based, political, corporate or otherwise. The local and global money flow may be restrained till the political cloud clears completely. The overseas funds would like to delay fresh flow even if recovery from global credit crisis relatively hastens a little more this week.

The bottomline

Interestingly, the market broadly, and habitually, has placed a bet on the worst. Odds are still high on fall of the Government and an untimely poll. A sell-off has been put on hold and the corrections have, so far, been measured. Dalal Street seems to believe that none wants go to hustings unless forced to at this point in time. In terms of the slashed P/E in the first three weeks of August, the Indian benchmark index needs to bounce back in view of its returns and growth.

It would not be surprising if the Sensex falls 500 points or more in the first response if the poll could not be avoided. Conversely, it may make a sudden attempt to find a level 1000 points upwards, if domestic uncertainties dissipate and global financial crisis does not worsen in the short-term.

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