By-Syed Zahid Ahmad :Though Reserve Bank of India (RBI), through monetary instruments succeeded in protecting Indian commercial banks from global financial crisis, the Securities and Exchange Board of India (SEBI) did not succeed as much to protect the stock markets. From January to September 2008, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) jointly lost Rs. 56,47,685 crores in terms of market capitalization which amounted to more than Gross Domestic Product or Aggregate Liquidity Stock of India. The regulators of stock market presumably did not pay enough attention to this loss, probably because it is not a debt based entity and they saw no need to bail it out.
During 2006-07 to 2007-08, the growth rate in financial sector has been higher than other reality sector growth rates. We have now reduced demand of credit and RBI Governor opines that it is due to slow down of economic growth whereas practically the higher cost of credit during global recession has restricted growth in credit demand.
Unable to attract even 10% of national domestic household savings form less than 2% Indians, with liberalization of capital account, the Indian stock market has been mostly heated up with portfolio investments by Foreign Institutional Investments (FIIs). After liberalization of capital accounts in 2004-05, with increased foreign inflow the stock indices started picking up new heights due to increased trade volumes; but after sense of global financial crisis, the decline in indices is also noticed at faster rate with rapid outflow of capital from stock markets. The stock markets are now more exposed to international capital market, thus the global financial boom and crisis considerably affected the Indian stock market. Now any appreciation or deflation in stock market indices up to 5% in a single day is a normal rate of fluctuation.
When the Market was moving upward, during nine months period Market Capitalization at BSE increased by 102.25% (from Rs. 35,45,041 crores in March 2007 to Rs. 71,69,985 crores in December 2007) and by 94.32% in NSE (from Rs. 33,67,350 crores in March 2007 to Rs. 65,43,272 crores in December 2007); financial experts were quite happy to cite the growth rate in stock indices. Pity to observe that this tremendous increase in stock Market Capitalization has not helped the GDP growth rate to move north, instead during this period, the GDP growth rate has declined from 9.2 in the first quarter to 8.8 in the third quarter during 2007-08. Since this considerable increase in Stock Market Capitalization was not chanalized to productive system, rather restricted to speculative trade only which could not last long without real economic growth, by January 2008 onwards the Stock Market started falling and during a period of nine months, Stock Market Capitalization of BSE declined by 41.91% (amounted as Rs. 41,65,384 Crores by September 2008) and NSE by 40.39% (amounted as Rs. 39,00,185 crores by September 2008).
During growth of market capitalization at BSE and NSE, unprecedented amount of money been invested in stock derivatives. These trades and investments in stock and derivatives did not helped GDP growth, rather created inflationary pressures in India. Since the real economy could not grow by speculations and derivatives businesses, with global recession and fall in GDP growth rate, the stock market started falling. While empirically it is proved that screen touch price mechanism of stocks could allow growth of speculative business only, and not the real business, the regulators have to think about means to convert the stock market capitals into real assets for production units instead of paper assets.
With monetary instruments we may handle liquidity pressure for shorter period, but cannot avoid consequences of recession without policy initiative to allow interest free or equity based banking and finance which is meant to counter problems like higher input costs, default in lease finances and gap in transacted and transferred traded values. The focus of SEBI to promote stock market trading should now be shifted to arrange FDI on project basis instead of encouraging share trading. The investments should be canalized into genuine project finances on medium and long term basis instated of short term investments on equities. For short term investors arrangements could be made for investments in short term trade finances. And the derivatives have to be purified from business of speculation and shifted to real term business.