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The Vajpayee effect! Sensex surges

Nikhil Faleiro in Bombay

The Bombay Stock Exchange reacted joyously to the President's invitation to the Bharatiya Janata Party to form the government: the Sensex soared 69 points today.

The Sensex has been rising on good news from the BJP front. When, on March 2, the first day of votes counting, trends indicated that a BJP-led coalition government would secure a majority, the 30-share BSE Sensitive index rose a spectacular 150 points on that day.

Foreign institutional investors are believed to have pumped in as much as Rs 10.24 billion over the past month, optimistic that a stable government was returning to the Centre.

Troubled by the decline in the economy, and the fall in direct and foreign investment, the Sensex has been fluctuating around the 3250 mark, showing little sign of going beyond the 4000 mark. All other indices are down: the revised index of industrial production growth is currently pegged at 7 per cent (compared to 8 per cent by the previous index); agricultural production growth is down to a mere 0.1 per cent compared to last year's 7.9 per cent; and GDP growth has now been pegged at 5.5 per cent compared to the previous 7.5 per cent.

The Sensex today opened at 3780.89 points and touched a day's of 3832.51 points within an hour of trading, amounting to a rise of almost 120 points over the previous close of 3716.50 on March 11. However, the Sensex lost ground through the day and finally closed at 3785.23 points, netting a gain of 68.73 points.

Praveen Shah, executive director and head of equity research, Morgan Stanley India, points out that everyone in the market is bullish. "The fundamentals are slowly recovering," he said, "What is needed is a trigger to set off the bull run and that is what the stable government will provide.

Initially, the FIIs were worried about the different statements emanating from the BJP camp. But those fears are being allayed to an extent with it becoming quite apparent that a liberal person will take over as finance minister. For the market, the choice of finance minister is more important than prime minister.

The Sensex has fallen over 1400 points (31 per cent) from its August 1997 peak of 4605 points, having gone into a deep downswing last November after the economy was hit by the decline of the rupee and the side effects of the Southeast Asian crisis.

The Southeast Asian crisis also saw an outflow of foreign institutional funds from the Indian capital markets, increasing from Rs 5.5 billion in October to Rs 5.8 billion in December, but dropping to Rs to Rs 3 billion in January 1998, amounting to a total of Rs 14.3 billion.

However, this trend was reversed and began to increase when it became apparent that the BJP was the only party in the recent elections with the capacity and capability to win the forthcoming elections.

This election expectation saw FII investments rise to Rs 7.4 billion in February, and it is Rs 2.5 billion already in the first week of March.

However, further FII inflows will depends on who next finance minister. Says Samir Arora, vice-president, Alliance Capital Asset Management Company, "The big question is who will be the next FM. Is he someone the FIIs can trust? Is he a professional who understands about the state of the economy and the remedial measures needed to rectify the problems? There is no doubt that the BJP will continue with reforms, so the question is not of which party is in power, but who the FM is?

"We feel that the coalition members will fight amongst themselves. But, if the FM is a professional, then his personal views will hold over the rest and be a guiding light," adds Samir Arora. "And all the members should just shut up because they are talking too much and creating confusion among the foreign investors."

Nevertheless, despite the confusion about India's future economic policies, the country still remains the land of opportunities. According to the 'Morgan Stanley Dean Witter' fortnightly review: The forecast for the growth in earnings in 1997-98 for the Sensex stocks was eight per cent, but prospects for 1998-99 are much brighter as the Sensex stocks are trading at nine times the 1997-98 earnings.

Similarly, Merrill Lynch expects growth in earning per share for the Sensex scrips to be only 5-6 per cent in 1997-98, but 11-13 per cent in 1998-99.

Compared to the Southeast Asian markets that are going through economic upheavals and resorting to IMF prescriptions, India's low current account deficit, low short-term debt, and a largely insular economy makes it an attractive buy for FII investors.

Also, irrespective of where the market is heading, there is general consensus among the FIIs that economic reforms are here to stay. In fact, FIIs today ask to new level will the BJP take reforms up to? If reforms stay on course, then FIIs are expected to pump in an additional $2 billion into the country which will take the Sensex beyond the 4500 mark.

Samir Arora put it succinctly: "The only kursi (chair) we are interested in is the finance minister's kursi. Put the right man and the markets will just takeoff."