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Markets rattled by blasts

Nikhil Faleiro in Bombay

The blasts reverberated through the Bombay Stock Exchange which awaits with keen anticipation the Budget, scheduled to be announced by Finance Minister Yashwant Sinha on June 1.

Barely had the market cooled down after daily trading on Monday when things began to heat with news filtering in about the triple nuclear explosions at Pokharan in Rajasthan. The rumblings of the shock had barely finished when the markets began to go into turmoil with the Indian paper listed abroad taking a heavy beating at the hands of the bear.

Most people were euphoric that India had finally made it into the big league and politicians like Shiv Sena leader Bal Thackeray gloated: "We have shown the world that we are not eunuchs!" Business leaders too supported the government and chambers of commerce welcomed the move to conduct the nuclear explosions, insisting that India was ready to face the consequences.

However, market sentiments changed swiftly after the international community closed ranks against India. While the high commissioners of Australia and New Zealand were recalled for "consultations," the United States and Japan spoke of invoking economic sanctions. With the long-term costs slowly sinking in, the mood in the markets went into a tailspin.

This was reflected today in the National Stock Exchange which sank an astonishing 55 points within five minutes of the start of trading! However, the Nifty recovered to close at 28 points lower. The Bombay Stock Exchange was similarly sombre as foreign institutional investors unloaded large quantities of shares during the trading period. The Sensex nosedived immediately and despite massive purchases by domestic financial institutions, the 30-share Sensitive index lost over 77 points.

Says Shaun Browne, head of the HSBC Investment Banking, "What is scaring brokers is what will happen to the Indian economy. If the US government imposes sanctions, then many US companies will find it difficult to fund their activities here, and that is their main worry."

Admits Asit Mehra, managing director, Nucleus Securities, "Till the uncertainty over what the future action against India is made clear, the Sensex will continue to fluctuate and any adverse rumour will cause it to crash. This is the first time India is in such a condition."

Moreover, India also runs the risk of its sovereign rating being downgraded. Moody's has refused to officially comment on a downgrading, stating that it is awaiting the world's reaction. Moody's said it is waiting to see whether the sanctions imposed are only by the United States, or more broad-based and including Europe and Japan.

Any sovereign downgrading will cost India dear as it will result in the country receiving less aid and funds from the credit and equity markets. Moreover, US sanctions will means that loans from financial institutions will stop save for the purchase of agricultural commodities.

Even worse will the stoppage of dual use technology, which is of paramount importance to India's nascent industries. "It is this freeze that will be the greatest harm to India," says S S Bhandare, economist, Tata Services Limited.

As per US law, Washington will be obliged to vote against all future World Bank and International Monetary Fund loans to India. While this may not amount to much under normal circumstances, it could turn catastrophic if India were in a situation similar to 1991 when the country faced a balance of payments crisis. It is the fear that these long-term consequences could send India back to a closed door economy that worries businessmen.

The selling of Indian paper in international markets has given rise to doubts that such a panic situation might soon invade India. If that does happen, brokers fear the noise made by the foreigners's rush to leave the country will be larger than the bang that occurred in Rajasthan yesterday.

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