India’s legal satta bazaar

The BSE Sensex is touching new all time record levels and breached another ‘psychological barrier’ by crossing the 23,000 level on May 9.

Since early February, the Sensex has risen by close to 14 per cent, taking an already inflated index to record highs.

The current bull run in the Bombay Stock Exchange comes not very much after the previous rally between August-end last year and January-end this year (which delivered a 19 per cent rise in the Sensex) (Chart 1).

Given the nature of this market, it is obvious that the surge in the index is because of a spike in investor demand for a limited amount of actively traded stocks.

Despite the large number of companies listed in India’s markets, stocks of only a few are traded very actively (except in speculation season), and there are few stocks of even those companies available for trading on a normal trading day.

Leading the pack of speculative investors driving up the prices of these stocks are foreign financial investors, who alone have engaged in cumulative net purchases worth ₹860 billion or around $15 billion between May 1 last year and May 10 this year.

As Chart 2 shows, there does appear to be a close relationship between the trajectory of the Sensex and that of cumulative FII investment. But it was clearly not just FIIs who were rushing into the market, and driving the index.

The horde of investors included a fair share of domestic speculators too. The herd instinct keeps them all going.

If financial investors are seen as even vaguely rational, this would be surprising. Rising equity values imply that investors are expecting the returns from the underlying assets to rise sharply. But all other indicators point to flagging demand, a deceleration in growth and a profit squeeze.

The same newspapers that celebrated the 23,000 record reported that April was marked by an over 10 per cent decline in passenger car sales (relative to the corresponding month of the previous year).

That was the second largest month-on-month decline (after the 11.7 per cent of May last) in many years. The market remains unaffected by fundamentals. Those who drive the Sensex are also declaring they don’t care about the real economy. It is the Sensex that matters, and the higher the better.

In fact, the Indian boom is surprising also because its current behaviour deviates from trends in many other emerging markets.

In the recent past, when “Quantitative Easing” in the US and elsewhere was injecting large volumes of cheap liquidity into international markets, most emerging markets (including India, but barring those with special problems) were recipients of cross-border capital flows and experienced buoyancy in their equity markets.

This time around, other Asian emerging markets such as Thailand and South Korea have experienced buoyancy that was much more muted (Chart 3), and the Malaysian market has been flat.

Elsewhere, Brazil’s Bovespa and Russia’s Micex have experienced large losses. That makes the speculative bubble in India unusual and, therefore, even more fragile.

As is normal, in search of explanations for these contrary trends in India’s “market”, other emerging “markets”, and the real Indian economy, analysts have been grabbing at straws.

The thinnest of them is the argument that expectations that a stable government with a business friendly Prime Minister (read Narendra Modi) will be delivered by the elections are driving investors to grab stocks of firms that would profit from the boom the next government will set off.

Underlying even this explanation is the presumption that the bull run the market is experiencing is driven by speculation. Speculation about the outcome of the election.

Speculation about the nature of the next government. And speculation that when that government does what it is expected to do, profits would rise enough to warrant the high valuations.

The cause for speculation is implicitly seen as justifying the markets irrational exuberance. In a headline that reflects nothing but similar speculation, one newspaper declared: “Sensex sniffs Modi win, kisses 23,000.” Speculation on electoral outcomes is not unusual in a country that gambles on everything from cricket to politics.

According to a report from a Delhi-based newspaper correspondent who visited the trading town Hapur in western Uttar Pradesh, in the satta market “the odds for Modi wearing the crown in Delhi are 20 paise. This means if he becomes the prime minister, a person betting ₹1 lakh will get a return of ₹1.20 lakh. But stakes are much higher for Rahul Gandhi. In his case, the odds are ₹10, which means one can get ten times the bet amount.”

The bet is on a reading of how India’s huge electorate would behave and what that would deliver in a dicey first-past-the-post system. So gambling does not occur only in Dalal Street. But when it occurs there, it becomes credible, justified and a barometer of the political mood.

There are many reasons why the final outcome, let alone the sequence of events leading up to it, may not coincide with the expectations of the punters.

To start with, though the psephologists are near unanimous in predicting a one-sided result, the election outcome may be more divided, throwing up another government that cannot want only pay off Indian business as markets expect it to do.

Second, even if a government with a comfortable majority is formed, the task of addressing the current stagflationary tendencies in the economy is unlikely to prove easy.

Pushing growth with government spending and transfers to the private sector could aggravate inflation. On the other hand attempts to rein in inflation may dampen growth further.

Finally, there is no evidence that any government that is likely to come to power will deviate from the UPA’s neoliberal economic agenda, which does seem to have generated the current growth slow down and the associated cost-push inflation. So reversing the downturn would require more than just ‘any’ change in government.

If expectations are belied, a collapse of the current bubble is inevitable. So, whatever government comes, the sensible would place their bets on the coming market collapse.

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