The bear hug: the many reasons behind the Sensex crash

Bhaskar Paul/The India Today Group/Getty Images

The bear hug: the many reasons behind the Sensex crash

The issue

  • The Sensex has been dropping steadily. Investors are getting jittery.
  • Global investors like Marc Faber say Sensex may go down further.

Why it happened

  • Experts say Modi-euphoria had pushed the Sensex up almost 55%. A correction was inevitable.
  • Algorithms made computers take a call on final assessment, which brought down the Sensex.
  • People have begun to doubt the Modi government's ability to deliver on promises.
  • Investors realise reforms will take a while.

Points of concern

  • Government is bogged down by opposition and allies over land acquisition bill.
  • Elections in Bihar, Bengal and Uttar Pradesh may make the government more cautious.
  • Overall economic situation is bleak, with recession-like signs on horizon.
  • If the US raises its benchmark interest rates, many short term investments propping up India's stock market might make a run to the US.
  • India's gold reserves are meagre.

It is difficult to say what came first - pandemonium or panic. But at the moment it is both. The optimists are trying to convince people that the fall in the Sensex, the lowest in the past five months, is a correction to the unjustified euphoria generated by the high-octane propaganda by Prime Minister Narendra Modi.

Hard core realists, though fully supportive of Modi, never participated in the hysteric festivities of the market. The Sensex had risen over 55 per cent between September 2013 and the campaign's high point in March 2014, when Modi was officially nominated by the BJP as its prime ministerial candidate. Now it has fallen by about nine per cent, which does not mean there is a catastrophe.

The strong selling on algorithmic trading platforms accentuated the fall of the Sensex. The algorithmic intervention is a kind of automatic response by advanced software models, which are created by minutely monitoring past trends that could have an impact on future.

There are also those who have begun to raise doubts over the Modi government's ability to deliver

There are several algorithmic exercises, but when all of them pointed to the negative attributes, the computers virtually took their own 'final assessment'.

However, whatever the accuracy of the analysis of the past dictating terms of the future, these models do not necessarily predict a sustained doom or continuous boom.

Can the government deliver?

But there are also those who have begun to raise doubts over the Modi government's ability to deliver. That is why, despite the relatively easy passage of the Goods and Services Tax Bill (officially known as The Constitution (122nd Amendment) Bill, 2014) in the Lok Sabha, the market was not impressed.

The government will not be able to pass and implement the new land bill. Even if a joint session of the Parliament is called and the bill goes through, it would not be possible to acquire land because there is a distinct possibility of acquisition going the Singur-Nandigram way.

Moreover, BJP's own front organisations, the Bharatiya Kisan Sangh as well as the Swadeshi Jagran Manch, are opposed to the idea of land acquisition in this manner. Also, with three states - Bihar, Bengal and Uttar Pradesh - going to elections soon, any controversy over the land bill can derail BJP's chances.

Just a few months back, it was taken for granted that the BJP will form the government in Bihar, be a runner up in Bengal and will become the most important player in UP.

But now doubting Thomases have also begun to predict an uncertain monsoon and that would become an additional factor for spreading discontent in these predominantly agricultural states.

Sensex may drop further

Marc Faber, renowned global investor and author of The Gloom, Boom and Doom, has said in an interview that "investors are awakening to the fact that reforms will take a lot of time and many may not even be implemented."

He says that long term prospects are not too bad, but in the near future, he would not be surprised if the Sensex drops to the 24,000 levels. Faber has further said that there will be pressure on the Reserve Bank governor to lower interest rates.

If the rates are lowered, the rupee could begin to weaken more and even if the stock markets go up, the rupee could continue to slide and, in dollar terms, foreign investors are not going to make much money.

Apparently even the trust level of the Modi government is going down. Sunil Deshmukh, an NRI monitoring the Indian economic scene for over 40 years, says that the UPA government had predicted 5.5 per cent growth in 2015.

The government has "cunningly", he says, changed the parameters, rather the definition, of the formula to shows 7.5 to 8 per cent growth. If the same parameters are used then growth will be seen at five per cent.

By lowering the limit for pass marks, one can allow more students to graduate, but that does not mean there is a surge in talent. The Modi government has realised that it cannot deliver in real terms and, therefore, is obfuscating and even fudging the numbers to create virtual growth.

Economic crisis staring at India and US

Another industrial economist from the US, Apek Mulay, who closely watches the Indian and the American economy has predicted that not only is India heading for an economic crisis, even the US is entering a phase akin to the 2008 meltdown again.

If the US falters, it will negatively affect India but even if the US stays on course, India cannot rise to the heightened expectations.

The Modi govt has changed parameters to show growth at 8 per cent. If the usual parameters are used, it would be 5 per cent

Mulay says: "When the US raises its benchmark interest rates, most short term investments which are propping up India's stock market are going to make a run to the US. But with a drop in overseas remittances and foreign investments, India's currency will be hit badly. In that case, the government will have no option but to run to IMF to seek a loan".

That, according to Mulay, will be disastrous because according to the World Gold Council, India has 557.7 tonnes of gold as of March 2015. "Given inflation in recent times, India's gold reserves are too meagre to sustain its ever-growing trade deficit especially when the US raises its benchmark interest rates later this year."

That is why perhaps, the pragmatists in the government are saying that the time is ripe to bring out the gold from temples and also that is held privately.

Overall, the roller-coaster ride of the Sensex is going to cause further pandemonium and hence panic.

The views expressed here are personal and do not reflect those of the organisation.

Kumar Ketkar @kumarketkar