Crisis Hitting Real Hard!!

The scariest day in market I had seen till date has to be Monday 27th October 2008. My heart bits almost stopped for a spike moment when I saw sensex below 8000. I had done very nice analysis in last four months on how long the down side is left with market and last time I did mention that there is still blood left in the market which will come out. But this is the very first time I have no answer to any question that may ask about the bottom for the market on when they are going to open tomorrow. I guess this phenomenon is way beyond any analysis or explanation, an unprecedented fall which doesn’t have any technical support. How could it be possible that only if FII pulled out money that too just over 16 billion dollars from the market would let it break so deeply?

I as any investor in market am under definite clinical depression on the loss of money and faith on the stock market. I can not go back and blame to the FII for making this happen as I know they are also going through the same turmoil in their own country and can’t be adjudge guilty completely, I now strongly feel that it’s Indian finance ministry and RBI to be blamed for this catastrophe. When you look back to entire crisis happened world wide they were mostly supported by a bubble blast; a bubble of sub-prime mortgage when we talk of the US market. The same real estate bubble was the reason of Asian stock market crash decade ago. All in all when ever there was smoke, it’s definitely fire somewhere around. But what could be the reason of the rise and fall of India’s most attractive investment institute “Stock exchange”. With my understanding I am listing few of the points which according to me are the driving force for this issue.

1. Dollar value: History has witnessed that when ever the dollar value is under pressure, emerging markets like India and others had got the most of the breathing space in the world economy. This was the case between 2003 till 2007, when Dollar value against the currency of world emerging market was at decline hence the trading margin were quite high, yielding the high end profits as well as lowering the operational cost. But now when we stand at 50 Rs per dollar the operating and trading margin for any company would be at a toss seeking a poor performance in all their profit books. This is not only true for India but all other emerging markets like Brazil, Russia etc.

2. Commodity price: While in July we reached the benchmark one barrel price of crude oil as 150$, now we stand at merely 62 $/Barrel. This shows the pressure on the commodities market of the impact market crash has induced in the world economy. Same is the case with the metal stack where all the metals including gold and silver are under their year low costs. Be it the steel, zinc or copper, all are under their historic low values for the year. Although this low cost in not only hurting their respective industries but there are no buyers out there in the market and the reason for that is the most important reason of all which I am going to explain the next point.

3. Finance Ministry and RBI role: How many times our finance minister has come and assured that the Indian company has strong fundamentals and there is enough liquidity in the system to withstand this crisis time. Very well said Mr. FM but the point which he doesn’t understand is: for how long economy would be able to sustain the pressure like this? There is no stopping of bad news and from last 10 months we are only living under the threat of yet another big fall every next day. At such times if the government doesn’t take proactive steps assuring safeguard of Indian industries then we are not far from the down fall we had seen in US this year. It’s very heartening to say that we are right on the path of yet another Greenspan (Formal federal governor in US) in making for India if the FM and RBI don’t take steps to assure buying and propagation of liquidity. I am sure the time is not far away if the same conservative wait and watch strategy is going to be followed by the Indian top brains when RBI and FM would come up with bailout packages to revive the defaulted companies and industries. One of the examples is the aviation industry where government of India is aggressively looking to have their share at some percent to ensure they don’t shutdown their operations and push us back 10 years in development. This is the first leaf we have seen falling off from the big tree, trust me there are many more to follow if the awakening is going to take substantial time from the RBI and FM side.


It’s always easy to blames others and wash off your hands from the problems. Don’t blame US entirely for the crisis back home, yes they are one of the substantial reasons and no one is denying that but then we need to deal with the crisis on our own, we can’t expect US to come out and help us to get over this prolonging hangover when they their self are looking for some helping hands. What I could see as a good strategy from the RBI side is to form an institute that will be a domestic buyer in the market. One would argue that SBI and LIC are doing the same on behalf of government, true but they aren’t aggressive enough and most importantly they need to see their balance sheets. They would not like to come in red in their quarterly results thus would do defensive buying in the times of market turmoil. All the stocks, be it the front liners, mid cap or small caps are available to be picked at very cheap price. Most of them have formed there fresh lows or available at their 52 weeks low, if government injects buying of around 10-15 billion in the market, their profit in next one year would be no less than 30-40%. If government can let FII to make such big margin profits from our market then why not them taking the lead in the recovery of Indian stock market. This is going to help them in two ways, one they would be able to make profits out of this and also when they are the biggest buyer they would be in position to turn the market regulations as they want them to. This will surely safeguard us from the massive sell off we have seen from the FII and hence would minimize any such crashes in near future. This would be a much better proactive action than coming later with bailout packages to revive the market and industries.

I must say the new governor for RBI has come with a mindset of central bank functioning which is very defensive and conducive, he is not aggressive in his strategies. We have seen cuts from the RBI in both CRR and repo rates lately but how much is enough no one knows. The simple reason for raising these entities was to ensure that inflation should be under control. I am not saying that stock market is the health of any economy but yes they mirror the conditions within and if the market is bleeding so severely that too from so long then there should be some healing medication required from the RBI side. RBI thinks that inflation is the only factor which hits the common man and they want to help them by letting the inflation rate come down. In doing so they raised the CRR and repo rates, this resulted squeezing the liquidity. Landing and borrowing money from RBI and inter banks became difficult on such higher interest rates. This made the entire bank sector to land money to the individuals and institutes more difficult. The pressure of world crisis aggregated with this step from RBI and started hitting by liquidity crunch in the market. There were no buyers available in the markets and FII were already in exit mode, hence we saw the historic sell off in the market. RBI and finance ministry must understand that they are in place to protect investment of a common man. But delay in taking the appropriate steps to revive the conditions at home could potentially put us in the road of recession where we would start seeing job cuts and depression. When Indian farmers started committing suicides then our government woke up from the sleep and came with a relief package of 60,000 Crore, I just wish not to see same pattern repeated in the share and job markets. And for doing so Indian government has to put breaks on the liquidity crunch by investing in the market for good of common man. The gentlemen sitting in RBI and finance ministry are much wiser and experienced enough but as a common man I have my own apprehensions when I see such turmoil around. Let’s hope that we have seen the worst time and the future from here is bright.