Sudip Bandyopadhyay’s Blog

The current Wall Street crisis should put an end to false debates about government versus markets.  Governments create markets, and markets can exist only with regulation.   The real trick is to craft good regulations that allow markets to work well.  No regulatory structure will be perfect, none will eliminate risk, nor should they.  At best they can tame the wildest gyrations of the market economy while maintaining its efficiency.  The first task of the US Government & Fed remains to bolster confidence.  The next is to devise a workable and flexible plan to dispose of the mountains of assets that the government is taking over.  Then, after some thought and analysis, should come the fixes needed to better structure America’s massive and complex financial markets.

Amidst all this gloom and doom, the main reasons the saavy investors  are still excited about the Indian economy are its size, its rapid growth and the fact that some sectors of its economy have become truly world class in pretty quick time.  India is already the world’s fourth-largest economy when measured in purchasing power parity terms.  Jack Welch, GE’s former chief executive officer, perhaps summed it up best with his comment that “India is a  alrady a developed country as far as intellectual capital is concerned”. The global financial crisis has brought a fresh focus on the debate about the Indian Financial and Monetary Policy Reforms.  Percy Mistry and Raghuram Rajan committees’ reports represent interesting ideas on such proposed reforms.  The basic suggestions are in the areas of correcting mistakes in the regulations for institutional investors, changing the flawed regulatory architecture (India has an alphabet soup of regulators), improving  legal framework, making financial firms big, removing  tax distortions, removing  capital controls and encouraging  outward orientation  of financial firms.  In fact the global crisis only reiterates the fact that the reform process should be continued to ensure that India becomes the preferred destination for investments.  The mistakes in the International Financial Market needs to be studied and understood and the current crisis should not lead to the conclusion that the homegrown decade long effort of understanding the problem of Indian Financial markets  and steps suggested for solving them must now be discarded.

Indian markets continued to witness relentless selling pressure during the week on weak global market cues, driven largely by crisis of confidence in the financial sector. More notably towards the end of the week, some large FIIs were seen selling to raise cash levels on their entire equity portfolio positions. This was also one of the main reasons one saw a sharp price correction in market heavy weights during the week which contributed significantly to the fall in indices. Crude prices also continued to remain volatile throughout the week and fluctuated widely between $ 98 dollars a barrel to finally close the week at $ 105 a barrel. Inflation numbers for this week also remained flat at 12.14%.   Interestingly a major part of the FII selling in the Indian markets was seen on the cash side and not on the F & O segment side indicating that this was some sort of panic selling resorted by some large FIIs in large cap stocks.   Globally the US markets continued to remain in negative territory with the Dow losing significant ground on increasing anxiety from investors on the final shape of the $700 bn Fed bailout package which is now eagerly being awaited as a immediate positive sentiment trigger in the short term. Earlier the Fed had banned short selling to counter a further market fall, but even this did not have the desired effect on stock prices.

For this week, the markets clearly look set for a more sharper volatile trend in the near term as the pain in the global markets is not fully over. More importantly the market sentiment continues to remain jittery and uncertain and this was clearly visible from the recent Nifty rollovers in Sept 08 at 60% as compared to 75% for August 08. Also in the forthcoming week which will be a truncated week, most market players are expected to remain on the sidelines with lighter trading positions and keenly watch key developments in the US markets especially news pertaining to the Fed Bailout package which when implemented may boost the market sentiment in the short term. The Indo-US Nuclear deal being cleared by the US Congress is also expected to aid the market sentiment positively this week.

( ** this is the transcript of the weekly column I write for Economic Times )