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Monday, May 22, 2006 

Stock Market Crash and the Economy

For the past three years, the stock market has seen an unprecented rise. From languishing in the 4000s, the stock market has risen to more than 12000. Simultaneously, the Indian economy had been growing consistently at a rate of more than 8%. Different reports indicated that India and China would be the drivers of growth of the world economy.

Many experts claim that the rise in stock market is an indicator of the growing economy. It was our robust economy that had attracted foreign institutional investors (FIIs) towards the BSE. Many reasons were given for the continued FII romance with the stock exchange. However, all, of a sudden, the markets seem to be crashing. FIIs have panicked into selling, and others are following them.

All it took was the rumour of a bill on taxing stock market investors in the same way as traders are. The FM started shouting his favourite word, whenever the stock markets falls, i.e. “Conspiracy” , and denied all reports of such a tax. **Digression: The Sensex crash couldn’t have come at a worse time for the government. It coincides with the completion of two years in power, and the middle class is upset over reservations. The Congress has done poorly in two states that had gone to polls recently. The government-bashing left has just grown stronger. End of Digression **. This did not pacify the FIIs, and the Sensex continues to fall. If the stock market is indeed a function of the economy, then does it mean that are economy can sink because of a rumour?

Experts have always linked stock market boom to the boom in Indian economy. While I am no expert, I never quiet agreed with them. I have always held the belief that stock market rise is all about sentiment. If the market sentiment is good, the stock market will do well even if the economy and industry in general don’t. It has been seen time and again that a few individuals can manipulate the stock markets for their personal gains.

The market may be one of the factors that moves the economy, but is certainly no indicator of the economy. But this does not mean that the FM can relax while the market falls. The bad sentiment from the market starts affecting other sectors very soon, spreading depression. The Finmin must ensure that a positive sentiment prevails once again in the market.

being an equity analyst i dont believe to many views in your article. I am sorry to say this but the economy doesnt move because of the market. Not even 1%. Finman doesnt need to pass comments about the market. What he must do is make the systems more powerfull so that we dont see scnadals again in the market. A 500 or a 1000 point fall doesnt mean the economy is not going to grow at a 9% rate. Why does the stock market affect other sectors? What is the stock market? How does an analyst analyse companies and the sectors. Which factors are responsible for the market to go up or fall. Does a fall indicate a bear run or a 1000 point surge indicate a bull run? nothing happens in 1 day or a week. When the BJP government lost the elections the market fell by more than 800 points. But did that indicate a bear run. From then on the market has moved just one way and thats up. Please dont spread the wrong message to the people. I know its your view but the market involves a lot of money and lot of retail investors bet their life saving in it. SO please get the facts cleared.

@ Ankked: Thank you for you comment.You are free to agree or disagree with me. I didn't mean to claim that the stock markets are the only movers of the economy, but they certainly are a factor. As i said , I am no expert, but as an expert, you must have noticed that whenever there is a bull run in the Stock market, there is a parallel bull run in the real estate and gold markets? A bull run in the real estate gives rise to an increase in construction activity, which in turn gives an impetus to so many industries (eg. steel, cement, labour, marble, etc ) . Thus there is an impact on many secors of the economy, which i have generalised to the economy.

As regards a single crash or a single rise. I certainly hope that our markets have matured enough to recover from such crashes, but my personal opinion is that the market is over valued, and correction needs to set in.

its abt time for another great blog buddy.

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