Economic Highlights

New Delhi, 30 October 2008

Over Rs 204,000 crore Loss   

RBI’s NEW POLICY TO RESTORE CONFIDENCE? 

By Shivaji Sarkar

“RBI inaction roil bourses”, “RBI’s no news is bad news for (stock) markets”, screamed newspapers over the Reserve Bank’s mid-year review, as the sensex tumbled to its 2005 level of below 8000. Unfortunately, it was the media and not the RBI which was on the wrong track. Whether the move to delink from the stock market is considered or not needs to be watched.

Given the stock market record since 1991 liberalisation, it seems imperative to sanitise the system and keep it off the volatile gambling, which takes place in the stock market world over. The liquidity that was added by the CRR cut is drying up again as it is being used to fund the market losses. The Indian financial institutions and banks, operating on the poor man’s deposits, have lost over at least Rs 204,000 crore in about 15 years.

Much of this was subsidized through direct or indirect budgetary bail-outs. But it burdens the poor man, who has to pay higher taxes and compromise on development and infrastructure programmes. It also increases government borrowings and fiscal deficit, which are likely to go over 5 per cent this fiscal year. Ultimately, it has affected the growth prospect, which is being lowered daily by different estimates of finance ministry, RBI, IMF and other rating agencies.

The world has gained little from stock market operations. It has neither helped the genuine investor. Since the 1929 New York stock exchange dip, most world crashes have been attributed to the stock market. The world still has to learn and leans heavily on the bourses to show a growth projection. In reality, it adds only to the growth of a few individuals and large corporates, who have a strong cartel to bleed world investors and consumers with their profits.

Sadly, when people had started believing in the great Indian “growth” story, the stock market went tumbling down sending ripples down many a spine. A pity not many people understand market operations. Highly inflated prices of Rs 10 or Rs 100 (intrinsic value) share is taken as an indication of investment and growth. This is neither investment nor can add to growth. Money merely exchanges a few hands and the smarter ones get the best deal, not the market.

The present tumble was clearly led by the foreign institutional investors (FII), which have been taking money out of the emerging markets during the past ten months. They have been withdrawing $ 800 million on an average per day from the markets. In June last, they sucked out over $ 2.6 billion from India.

When the sensex was at its peak in January, the Rupee was at Rs 39-40 to a dollar. It is now close to Rs 50, making the FIIs lose money by just holding on to in India. Their exit is followed by the exit of domestic players. There is a reason. Together the domestic players and FIIs manipulate the market to squeeze the best out for themselves and dump the worst on the small investor. The FIIs and big domestic players go scot-free, while the mall ones suffer.

In 31 of the past 44 months, FIIs have brought money into the markets and domestic players have followed suit to ride the buying wave. However, when the FIIs leave due to problems in home country or sectors, like the sub-prime crisis of 2007 or metal meltdown in 2006 or plain simple profit taking, they cause tremor in the markets.

The domestic institutions step in at such times. Often the government comes out with statements that it would take care of the market. That is apprehended as policy instruction to Indian financial institutions, particularly FI-operated mutual funds, for arresting the fall. It has affected many of them. Recently, the ICICI has officially admitted losing $ 35 million in such international operations, causing concern in the banking circles.

In the 1992-93 and 1994-98 share scams, the market shaved off around 42 per cent of the gains what is called the bull period. Then there is the bear hug, when the fall begins.  How long it would last is anybody’s guess. Previous ones continued anywhere from one to four years. The present bearish trend is only eight-month-old. The market fears it would continue as the FIIs continue their flight. And, this would drive the sensex to find the level, where it really should be—reiterating it is not part of the economy.

Again, there is a cry from the players in the market led by FIIs for cutting the CRR to add to liquidity. So far, the RBI has rightly not done it. It shouldn’t.  As a regulator it has to act tough and instruct all domestic financial institutions, pension funds and banks to keep off the stock market.

Let us remember that it is the common man who funds Banks and FIs. The money is not to be wasted in gambling – speculative operations in equity market. Instead of inciting them to have quick gains, the RBI should motivate them to invest in funds that add to long-term growth. That would also bring in actual growth and development.

Unfortunately, growth has been hit hard as liquidity was utilized to boost non-productive share market. It has made funding expensive, affecting agriculture, manufacturing, industry and all other sectors. The stock market regulator, SEBI too has repeatedly failed. It is not expected to succeed ever, considering the convoluted market operations.

Thus, it is time public-funded SEBI is given a new agenda, devise ways and watch how the domestic financial institutions (FI) keep off the market. If any FI does so its top functionaries should be heavily penalised. It also needs to promote campaigns to expose the realities of the equity market so that conscience investors do not turn to it.

The mid-year-review of RBI has sent a strong message that its focus is more on inflation and actual growth and not the equity market. Monetary policy cannot be made the slave of either the market sentiments or industry lobbies, who bolster their personal profits through equity market operations. The RBI is the catalyst but policy review has to take place at the government level. In fact, the government must change focus. It has to stop projecting the share market, as it takes away the focus from development and growth. Worse, peoples’ confidence is shaken—the government must change policies to restore it. ---INFA

(Copyright, India News and Feature Alliance)