nitinpahuja
Nitin Pahuja
<h1>Globalization and The Indian Stock Market</h1>
When the going gets tough, the tough gets going, This old adage appears perfect in the current market situation and it is really a tough time for investors. In this era of globalization and integration, the world markets are largely dependent on the US economy and this can be seen by the volatility in the stock markets all over the world. It’s hard to believe that people who have defaulted on their home loans in US are investing in Indian markets and making our economy stronger! Well no need to be surprised because that’s the fact. And other contrasting thing is that in the last fortnight the investors lost almost INR 18,000,000,000,000 i.e. 18 trillion rupees. So what had actually happened and why this sudden fall in the stock markets? Read on.
There are a few reasons for this ‘shock’ and they are the Sub prime mess in US, huge pull out of money by FIIs and Reliance Power IPO.
In US there are people who are rich, not so rich and those who come under low-income groups. The people from low-income group are not given priority while sanctioning loans. As their income is neither high nor steady, they come under the category of potential defaulters. So, lending institutions are not much interested in giving loans to them for the fear of default. These people collectively constitute what is known as sub-prime markets. In recent years, however, a trend of providing loans to sub-prime markets was going on in the US. Sub-prime loans were extended to these people with low income and high default risk. Despite their having a bad credit history, they were granted loans by lending institution on the premise that economy was quite strong and it was assumed that with a certain degree of controls, they wouldn’t default. Further these lending institutions were brimming with huge surplus of dollars and it was a good calculated move to invest them in the sub-prime markets. However, it didn’t turn out to be that way. High interest rates in the US started pushing up the numbers of people who couldn’t repay the loans. Slowly but consistently the numbers of defaulters started piling up. Soon it comes out that this situation was not limited only to these local defaulters and their lending institutions. These sub-prime loans were already resold by these lending institutions to other big investors as part of various investment products. As these major investments products have a huge customer base, the entire profit from them became quite vulnerable and risky.
Since the past two years the Indian stock market is booming and thanks to huge inflows from FIIs. Now those financial institutions in US also started investing in Indian stock markets because of better returns. But when the panic buttons were pressed, on that doomsday, these FIIs took out most of their money by selling their shares and hence the market fell.
The other factor contributing to the agony was the Reliance Power IPO. This IPO, one of the largest in the world ever and of course in India as well was incredibly over subscribed by 72 times. Most of the retail investors had subscribed for the IPO and majority of their money had gone into it. So when the market fell, these small investors felt the brunt as they were not able to pay the margin call on time to their respective brokers. As a result they lost their savings and many of them had literally become moneyless.
Now this bloodbath on the stock market was mainly because of Globalization. The economies of various countries are highly inter-dependent that a slight change in one economy can affect the other economy. For e.g. the recent rate cut by Fed by 75bps saw our stock market opening on a high note and that shows that small things like such which have no relation to our economy also affect our economy immensely.
But suppose if at all in 1991 we had not decided to go for globalization and liberalization than there would not be FDI, FII, ADR and GDR but there could have been a much satisfied small investors, retailers and day traders as their money would be only theirs and no one else’s. The reason why I say this is because the market sentiment is that the foreigners through the name of FII have started robbing us again by investing in stocks heavily and then booking profits by withdrawing their money heavily, thus harming the interest of small investors.
Though globalization is utmost necessary for the development of an economy but its high time that the finance minister and SEBI should look after these small investors’ interest, not by giving speeches to calm down stating that we have a strong foundation but by seeing that there is no speculation in the stock market by any big corporation; who die hundred times when the stock market crashes.
Having said that it also depends upon the investor in which stocks does he invest, has he done his groundwork properly before investing, like what is the beta of that stock, low or high and so on. But we all know that globalization is here to stay and this can be definitely said as to be the “Side effects of Globalization”.
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