The Hindu Business Line : Market mauled

THE SUGGESTION BY the exit polls of a hung Lok Sabha and profit booking using this as a cover appear to have caused the steepest one-day drop in equity prices in three years on Tuesday. Uncertainty over the election results is not comparable to systematic abuse of the capital markets that led to the previous biggest one-day decline in March 2001. Even between 1996 and 1999 when there were a couple of elections to the Lok Sabha, the stock market had not seen the magnitude of selling witnessed two days ago. Then, the expectations from the new government were modest; even a moderate effort at reforms, thus, came as a positive surprise. But the situation is different this time.

Over the past 15 months, a series of policy measures aimed at spurring growth across sectors; the dropping interest rates, the strengthening rupee, the forex reserves sweeping past $ 100 billion, the thrust on infrastructure, and the success of the disinvestment programme have all led to a positive perception about the incumbent government's role in the economy. Thus, the ruling coalition was widely expected to return to power with a comfortable majority. Continuity in economic policy and growth rates in GDP of 6-7 per cent over the next two years were taken as a given. But the exit polls after the first two phases of elections have rudely disturbed this perception. Actual outcomes have often diverged from such projections, but the market has, however, moved ahead to price in the likely consequences of any discontinuity in economic policy. Such a swift pricing in of uncertainty is an integral part of, and welcome, market behaviour. With two more phases of elections and their exit polls to come, the market will most probably be wobbly terrain over the next three weeks. The pounding taken by the PSU stocks, in general, and those from the oil and banking sectors, in particular, point to concerns about the disinvestment programme, and reforms and consolidation in the finance sector.

The likelihood of the Left parties, the Samajwadi Party and the Bahujan Samaj Party playing a crucial role in government formation has not been viewed favourably by the market; no surprise, given the thrust of economic policy measures outlined by these parties in their manifestoes. These parties do not enjoy the pro-reform image the Telugu Desam Party, the king-maker of 1999 did and does. If the eventual outcome pans out in line with the exit polls, and yet the BJP-ledalliance cobbles together a coalition government, it may take time before it can push economic reforms the way it has done over the past few years. A Congress-led government would have to lean heavily on the Left; this is not likely to be a welcome prospect for the market despite the Congress' progressive position on economic reforms. As for fundamentals, nothing has changed. The price action of Tuesday emphasises the importance of perception and expectations in asset markets. As these change, price effects are inevitable, and, at times this may cause near-term angst for investors and the government of the day. From a long-term perspective, the market is better off functioning in this manner. Regulator SEBI should not be concerned as long there is no systemic abuse.

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