Modern puppetry in stocks

After Tsunami there is sunshine on the Indian stock exchanges. The Sensex has recouped more than half of the 1,000 points it lost in three days. In conventional phrases, replacement support or bear covering made that possible. In effect, FIIs not only proposed but also disposed. Market fundamentals won't change so drastically overnight in the normal course. Even as this article is keyed in the market has tanked again. So the pattern remains the same.

For you and us, RBI and the index of industrial production (IIP) took the blame for the 3 days that shook the market. CRR, upped by a fraction, of course, slashed lendable funds with the banks. Rs.13,500 crores frozen. RBI had its eyes on the general price level. Did stock prices figure in its calculus? Unlikely. Stock prices have their own logic and rule of law - all framed by FIIs. No RBI writ runs there. FIIs have a tank full of fuel. However, the CRR changes were excuse enough to play the now familiar game; a bull run before a bear raid. The bowstring needs loosening before it is tightened further. 

Industrial production data also came handy as the other accused. The index falling for a month could well be a sign of a crisis in the making. That too by a wide margin. Luckily it haunted the market only for a couple of days. After that a sort of amnesia took hold and life is back to normal. 

The market known for long to be insensitive to the economy has now proved indifferent to its own body weight, cholesterol level and blood pressure. In 1999, when the Sensex crossed the 5,000 - mark its operatives celebrated the event by releasing as many balloons. Mark, there were no such pyrotechnics when the index climbed more peaks in the years to come. The market has outsourced not only its dashboard operations but its flying wheel as well. Some brokers called the Sensex's perch above 14k a blank shot. 

How far north would the sensex go? Seven years ago, in April 1999, it was resting at 3325. On its way to 14k plus it delivered up to 24% in annual returns. Unthinkable anywhere else. Though comfortable behind a protective wall made up of low exchange and lending rates, the Indian industry (service sector included) is not that mighty to underwrite returns of that high order. It is patently unsustainable.

For the FIIs with their total grip on the stock exchanges there is only one lodestar to follow - exchange rates. How the economy works is not their cup of tea. In China too they stick to the same game plan. Currency appreciation is very much on the cards there. There will be no let up in the flow of foreign funds until it takes place. The prospect of high growth rate is secondary factor. Overseas capital, and not the economic outlook, that keeps the market in high spirits. The real estate market also gets heated up for the same reason. A revaluation of yuan (or a punitive import tax in US) could prick the bubble. India's case is no different. 

Even as the Indian stock exchanges were in the swing-back mode, South Korea's Kospi index fell by 3.1%, its sharpest slide since June. Reason: the spike in its currency, won, to a nine-year high. 

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