COMMENTARY
INTERVIEWS
SPECIALS
CHAT
ARCHIVES

Govt's fall erodes BSE's market cap by Rs 350 billion

V V L N Sastry in Bombay

The BSE Sensex today crashed by 245.87 points or 6.88 per cent. The fall in the market capitalisation was about Rs 350 billion. The loss could have been higher had the one-week-long political drama been shorter.

The week's events helped the market to develop a sensitivity to the goings-on in New Delhi. So, on April 16, when Om Parkash Chautala of the Indian National Lok Dal announced support for the Vajpayee-led government, the market posted gains. So today's plunge limited the loss in market capitalisation to Rs 350 billion.

Today's distinct feature was the across-the-board fall of share prices: almost all of them hit the lower end of the circuit-breakers. The hardest hit were software and pharma stocks. Looking back, it is apparent that most of the share prices closed today at levels at which they opened yesterday.

A fall of 245 Sensex points in a single day points to panic trading. The question is, why did the capital market go on a roller-coaster ride? It has as much to do with the fall of the Vajpayee-led government as with the fears over the fate of the Budget.

The market perceives this year's Budget as one that could turn around the recession-hit economy. In such a situation, the markets would welcome anything but major upheavals. So, when the national government fell, the markets had but to follow suit, so to say.

Moreover, the market is also sensitive to the fact that any alternative government is likely to be another coalition of disparate groups, a chain of loosely held beads. How long such an alliance will hold together, is a point of concern to the capital markets.

That the Congress, the largest party in the alliance that is forming, is pro-liberalism is little consolation, given the pressure-tactics-happy parties like the All India Dravida Munnethra Kazhagam of Jayalalitha.

The markets are closely watching the Left parties' stance on the issue of divestment of public sector undertakings. Since the likelihood of the Left parties supporting a Congress-led coalition government looms over the economy, how the balance will be restored to the economy is the moot point. Will premature elections be the way out? Can the economy absorb the cost of a second general election in 13 months? The market is groping for answers.

In the immediate time-frame, that is, till such time the next government assumes office and the Finance Bill finds a smooth passage, the markets will move cautiously on scrip-specific fundamentals. Which is to say that positive sector-wise outlook will have little or no impact on the market.

Software stocks with no Y2K exposure are expected to rule the roost, as the companies derive their demand from their overseas activities, where assured markets offer them solidity.

Pharma stocks may take a downward swing till the Patents Bill is passed. The gloomy outlook on the core sector will continue till the new government spells out its agenda.

The next week will see the market supporting only those stocks that have strong fundamentals. The key to a stable market is the adoption of the Finance Bill. Until then, caution is the word for investors and operators alike.

The writer is vice-president and head of equity research and investment banking, Khandwala Securities, Bombay. E-mail: drsastry13@hotmail.com

RELATED REPORTS:

Markets sink as govt falls

Industry wants new govt in place soon

Sensex takes a roller-coaster ride

Business news