Don’t be Sensexy

Stock markets across the world are known for volatility. The bulls and bears often greet the market. The vicissitudes of Indian stock market drive away the small investors. This is precisely the reason for low participation of an average Indian in the markets. The reliance on Foreign Institutional Investors (FIIs) is growing. In fact, the exuberance of stock market is always associated with the herd instinct of these investors.

Cumulative net FII flows into equity markets rose from $13.8 billion over two years ending September 2012 to $24.4 billion over year ended September 2013 and $21.5 billion over the last year. Indian stock markets are breaking records. The Sensex rose by 33.7 per cent points over the year ending September 19 as compared to 10.4 per cent and 7.3 per cent respectively in the previous two years. Despite fall at times, Indian stock markets have been growing impressively.

The over dependence on short-term foreign capital flows is an unhealthy trend. This increases the vulnerability in the Dalal Street. The panic reaction to the policy of the United States Federal Reserve on quantitative easing was a classic example. Stability in markets can only be possible with large number of Indians participating in the stock markets. But, this is not possible given its volatile nature. The intermittent scams in the markets also scare the average Indian.

Transparency in the markets is still a long way to go. Many governance issues need to be addressed. Monetary policies in the advanced economies certainly impact the foreign capital flows. But, over dependence on such flows is to be blamed for the volatility. The International Monetary Fund has recommended greater coordination in monetary and fiscal policies worldwide. But, the iniquitous global economic order makes it a pipe dream. Global economy is yet to record robust growth. The monetary expansionist policies of the rich countries pose a threat of hyper inflation.

Excessive foreign funds have pushed the stock values beyond economic fundamentals in many cases. This weakness would haunt the Indian stock markets in the wake of any massive retreat of these foreign funds. The world economy is plagued by structural asymmetry with the rich countries at the centre and the emerging and poorer economies on the periphery. Given this character of the global economy, the foreign capital flows always behave in the interests of the richer economies.

Therefore, India should pursue a cautious approach towards foreign investment. Overdependence on foot loose or butterfly capital should be avoided in order to insulate stock markets from unprecedented volatility due to predatory foreign capital. Greater reliance on Foreign Direct Investment (FDI), that too Greenfield investment needs to be encouraged. However, indiscriminate inflow of FDI also may not help our economy. India’s economic development cannot be left to the whims and fancies of foreign capital. Indian capital should determine our development with foreign capital playing a supplementary role. Foreign investment should be encouraged into areas where India lacks capital and technology constraint.