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Jun

Long- Drawn Polls Cause 27,500- Crore Loss To   Stock Market

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Prof Shivaji Sarkar

New Delhi, 3 June 2024

Global uncertainties over rising interest rates and the jittery noise of Lok Sabha elections surpass the RBI’s Rs 2.10 lakh crore dividend boons, pushing the Sensex by 2100 points.

From its highest of 76,010 at the beginning of the week, it plunged to 73,866 as the BSE and Nifty indices closed in the last six sessions. The RBI forecast of 7 percent growth too has not boosted the spirits as the equity market has been pining for a higher growth. However, RBI claims that even at 7 percent the country would be one of the fastest growing economies in the financial year 2025. The Asian Development Bank and Fitch also concur.  But IMF, S&P, and Morgan Stanley put it at 6.8 percent and World Bank, Moody’s, and Deloitte at 6.6 percent.

The RBI has set a target of inflation at 4.5 percent though the central bank repeatedly has said that for the last ten years, average inflation hovered over 5.5 percent. The central bank also notes a slowdown in the previous quarter of 2023-24.         Global markets remained under pressure due to rising bond yields and denting hopes of a rate cut. A major concern is the spike in US bond yields pushing the 10-year yield above 4.6 percent. Some top companies that raised dollar bonds include India Bulls HF-$ 350 million; IRB Infra - $ 540 million; Adani Green Energy - $ 409 million and Sriram Finance - $ 750 million, as per Bloomberg.  The bond market can trigger the continuation of the FII selling, which will further depress the prices of large stocks. Volatility is likely to continue the next week due to political uncertainty and global developments. This has been a phenomenon since the elections began in April and now it is spiking to 24.8 – a more than two-year high on the benchmark for volatility India VIX. Except for occasional rises, the stocks remained stagnant.

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Article at a Glance

 

The Indian stock market experienced a decline this week, with the Sensex dropping by 2100 points due to global uncertainties over rising interest rates and the ongoing Lok Sabha elections.

Despite the RBI's dividend of Rs 2.10 lakh crore, investor confidence has been impacted, with foreign portfolio investors selling stocks worth Rs 3,050 crore. The election has been stretched over several phases, leading to administrative costs and affecting economic and trading activities.

The RBI has identified risks to the economy and has advised banks to address trading norms and diversify deposit sources to mitigate risks associated with interest rate fluctuations. The recent trend in US inflation data may cause a further flight of capital from India, leading to a fall in equities. The new government will need to approach financial and budgetary policies innovatively to attract global investors.

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In different phases, the losses to investors have been heavy. In the present melee, foreign funds were major sellers at Rs 3,050 crore. In earlier, trading also the FPIs sold stocks worth Rs 27,500 crore. The domestic funds were net buyers at Rs 53,600 crore. It means that the PSU funds were the buyers. This poses a risk to mutual fund investors. During the weekend the BSE Sensex had a minor rise of 0.18 percent or 132.44 points and the NSE Nifty 50 closed 61.75 points or 0.27% higher. These minor movements are not capable of recovering the losses.

It is found that some of the major corporates like Tata Steel’s profit slid 65 percent to Rs 555 crore down from Rs 1566 crore. It suffered a loss of Rs 594 crore. Of the 12 startups looking to launch IPOs in 2024, eight have incurred a cumulative loss of Rs 8,000 crore, including Swiggy, and Ola Electric.

A prolonged election has seen investor confidence being hit. Foreign portfolio investors preferred to unload more than buy. The election is a democratic necessity. The rulers, however, need to see it beyond political compulsions. Ideally, an election could be held in far fewer phases stretched to not more than a fortnight. Most of the southern states had a one-day poll schedule. Only the states of northern and eastern India had multi-phase polls. Even Tripura, one of the tiniest states with two seats, witnessed polls being held in two phases.

The longer an election stretches, the administrative cost multiplies. All political parties should sit with the Election Commission of India (ECI) to discuss how the modalities could be simplified to hold elections in the shortest possible time to take care of administrative, economic, and trading activities. Apart, it also needs to decide whether dividends by organizations like RBI or other PSUs could be announced during the elections. Such moves tilt the balance.

Profit booking at higher levels in the stock market has been a synonym for political or economic uncertainties. This needs to be avoided to the maximum. Polls must not come in the way of policy decisions either at the government level or corporate and other institutional functioning.

Election schedules are not a matter of mere political management. Polls are held to improve systems. If these affect any aspect of the governance, this must be corrected at all times and should be part of the standard operating procedures of the ECI.

Overall, there are risks to the economy, RBI says in its annual report. It has asked banks to address trading norms, banking book risks, and diversify deposit sources to mitigate risks associated with interest rate fluctuations. This variation has also an impact on the stock markets. Its decision to review priority sector lending guidelines and work towards formulating norms for the National Strategy for Financial Inclusion up to 2030 could have a wider impact on trading and businesses.

The RBI functioning is also being discussed. Its dividend payment of Rs 2.10 lakh crore is linked to a 17 percent rise in income and, a 56 percent drop in expenses due to a much lower transfer to contingency provisions during 2023-24. As against Rs 1.3 lakh crore in 2022-23, only Rs 42,819 crore was transferred to the contingency fund in 2023-24.

Another matter that has drawn attention is the domestic assets made up 23.3 percent against 76.7 percent in foreign currency assets, including gold deposits and gold held in the country as well as loans and advances to financial institutions outside India. The RBI holds, its annual reports say, 822.1 metric tonnes of gold. The value of gold held as an asset increased by 16.9 percent to Rs 1,64,604.9 crore on March 31, 2023.  It also mentions heavy liabilities other than deposits and notes issued at 92.57 percent.

The recent trend in US inflation data could make an interest rate cut this year. This could cause a further flight of capital from India even as the rupee continues to fall against the dollar and further falls in the equities are not ruled out.

 The market awaits new policy formulations. Till such time the volatility is likely to continue. It would require an innovative approach to the financial and budgetary policies to boost the overall market so that investors from across the globe are tempted to put their funds in Indian scrip and other instruments.

The new government has to trudge cautiously and intelligently to rev up the contours of the market and economy.

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