Let Sensex play itself out 2007

t is best that watchdogs of a country’s economic performance, especially, the custodians of public finance, refrain from making off-the-cuff comments on the complex happenings in bourses in motley gatherings where it is difficult to substantiate such observations with any kind of professional analysis.

From this perspective, the Finance Minister, P. Chidambaram, could well have avoided using the Hindustan Times Leadership Summit as the platform from which to make a confessional about how the Sensex sometimes surprised, and sometimes worried him, without clearly indicating when it did the one, and when the other! This was in the context of the Mumbai Stock Exchange closing on October 11 at its 15th record high in 17 sessions, and the Sensex being all set to race past 19,000.

His on the spot explanation that it was due to ‘copious inflow of funds from a number of sources’ could not also be said to be a breath-taking discovery, considering that foreign funds have bought a net $16.2 billion worth of shares this year, of which $2.8 billion was accounted for during October, and $370 million on October 11 alone. He gave out as his impromptu assessment that ‘these capital inflows are more copious than we would like them to be’, creating a ‘new situation’ over which, he assured the audience, ‘we will gain mastery’.

The occasion being what it was, there was no way he could elaborate on how copious he would like capital inflows to be and how and to what purpose he proposed to gain mastery over them. A few days earlier too, he had asked investors to be cautious before investing, in the now familiar standard disclaimer that appears with every market offering. He must have felt rewarded for his pains when the market slid down conspicuously soon after his cryptic pronouncements.

One can only surmise the reason for the uneasiness of the Finance Minister. He is perhaps haunted by the memory of one of his predecessors who is now the Prime Minister, and who was accused of having a restful sleep all through a similar boom in the early 1990s. That boom ended in a bust and turned into a scam, and Chidambaram does not want history to be repeated.

Robust conditions

His keenness to demonstrate that he is wide awake is understandable. But, there are many features which make the present situation different, though not necessarily new. First, there are no Harshad Mehtas manipulating the market and carrying out fraudulent transactions on an astronomical scale with the help of insiders in pivotal positions. Second, the Indian economy, touching a trillion dollars, has seen tremendous growth spread across the board - retail, telecommunications, aviation, auto, pharma, real estate, the works - and has the capacity to absorb the swings with the roundabouts.

Third, there is plenty of money in the hands of the country’s middle-class, larger than the population of the European Union or the US, and casting its lure for companies from all over the globe. This class of investors is market savvy and evolving into good risk managers.

Fourth, in the last 10 years, the RBI and the SEBI have put in place adequate early warning and surveillance systems making it possible to take pre-emptive action against occurrence of catastrophic contingencies. Fifth, one consequence of heavy capital inflows - rupee appreciation - can pinch at first, but business and industry are learning to circumvent it by being competitive in upgraded technology, delivery and quality, besides increasing the volume, velocity and variety of transactions.

Conditions are so very robust that the Finance Minister can very well let the Sensex play itself out as it may!