Foreign brakes slow down local markets

The uninitiated are bewildered. Experts are intrigued in silence. The issue is the behaviour of the stock and currency markets. India is the second fastest growing economy in the world. Yet its rupee is falling, touching a six-month low. Its stocks are dwindling. It defies the ordinary and the experts alike.

See the contradiction between the economy and the market. For the year 2005-06 India's GDP grew by 8.4 per cent averaging over 8 per cent for the last three years. The growth was double digit in the last quarter of January-March 2006. Its inflation is under control. Its corporate profits increase year after year. National savings that had flattened for too long has reached an all-time high of over 29 per cent, and is rising still. Its gross capital formation, just 24 per cent a few years back, is over 30 per cent last year. Its exports clock 25 per cent year-on-year growth. Even its sick agriculture has clocked 3.9 per cent growth in the last quarter of 2005-06.

There is optimism about the fiscal deficit for the year that is being reined in as budgeted, at 3.8 per cent. The foreign exchange reserves are rising despite galloping petroleum imports. Thus, the national economic story is all positive, despite oil price concerns.

With its high economic performance, the rupee must rise in value, not fall. That is, we must buy more dollars with less rupees. Yet we pay more, not less, rupees per dollar, now Rs 46 instead of Rs 44 a year ago. On the value of the rupee based on its purchasing power, we should get a dollar at less than Rs 20 per dollar against Rs 46 we are asked to pay! So the rupee already undervalued is falling even further. This is despite India's rise!

Again, despite the national economy rising, the stocks in BSE dither and fall. The market should mirror the performance of the corporates and national economy. But here in rise or fall, it seems disconnected from both. The national economy did perform well in '05-06. But it did not grow by 20 per cent for the stock market to gallop four times that, from 6500 points in January 2005 to 12000 points in April 2006. Why then did it rise? And why then the sudden fall in May 2006, by almost 2000 points in just two weeks?

Certainly the rise of the national economy could not have forced the market to fall!