ARE these the dog days of summer, or the start of something much worse? The stock markets have swung wildly in the past week, as the Unit Trust of India (UTI) tried to prop up share prices in the face of a selling onslaught by foreign institutional investors (FIIs). The UTI also had to tackle widespread selling in the market following rumours (despite denials by BSE president J.C. Parekh) that a group of brokers close to Harshad Mehta were facing default.
Initially, UTI wilted under the pressure. With a 156-point free fall in the benchmark BSE Sensitive Index on Wednesday, the market did not seem to be responding. By Thursday, however, the drop seemed to have slowed. After a wild point roller-coaster ride, the market closed 24 points higher.
The same day, SEBI announced strong measures to curb the bears who had been driving share prices down through short sales—the practice of selling shares without actually owning them in the hope that they can be bought back from the market at a lower price. The difference in price is the short seller's profit. The market regulator hiked the daily margin on short sales of shares (a standard move to rein in the bears) by 10 per cent to 25 per cent. Top BSE broker Kisan Ratilal Choksey explains: "When the market is in mandi (bear phase), margins will curb aggressive short sellers, and add stability to the market."
When stocks began to tumble after the Budget, panic buttons were pressed in the finance ministry. UTI was forced to prop stock prices and try and halt one of the sharpest falls in recent times. Buying at these low levels just might even benefit UTI. Says UTI executive director B.G. Daga: "We will certainly not miss an opportunity to invest if prices fall to attractive levels." But with UTI facing huge dividend outflows in its US-64 scheme in the coming months, how long can it continue to pump money into the market?
FIIs, which have been net sellers for over two months, have already taken Rs 423 crore out since June 1, against UTI's net investment of Rs 631 crore. But given that the total FII investment in India is around Rs 30,000 crore, do the government and UTI have deep enough pockets to tackle a serious flight of dollars? Reckons Choksey: "It would take 3-4 UTIs to stem the tide. Earlier, when one FII sold, another would buy, but now it's herd mentality." But the wave has been stalled. The market closed on Friday with a 12-point gain over the day before.
Many overseas investors cite India's recent nuclear tests and the perceived deterioration in the political and diplomatic situation as reasons for their newly bearish outlook on India. Says Richard Overton, MD, ITC Classic Thread-needle: "From a relatively safe haven in a somewhat chaotic Asia—in terms of capital markets—India is now seen as something of a flashpoint. FIs view political stability, particularly in emerging markets, as the top prerequisite. That's gone for now."
Ajay Srinivasan, managing director, Prudential-ICICI Asset Management, agrees: "India was seen as a major market for investment. But with the unsatisfactory budget, FIIs have changed their stand." The fall in the value of the rupee against the dollar last week (to an all-time low of Rs 42.44) also played its role in making the markets leery. Says Daga: "Fear about the rupee falling further and redemption pressures in many open-end funds have led to heavy selling." then rather pull out their buy at a later date, as they would get more shares for the same dollar. In response to this threat, the RBI allowed FIs to buy forward covers for their incremental equity investments. With the possibility of a cover, the FIIs can at least hedge their currency exposures in India.
New FII inflows into the market can be hedged against the possible depreciation of the rupee, protecting the dollar returns of the FII. Comments Srinivasan: "It's a positive move, which will stop the pessimistic attitude of the rupee. And the FII forex cover will also crystallise risk to some extent."
However, the measures may not work in a hurry. Overton clarifies: "FIIs will return when they have confidence in the political situation and when the economic outlook appears favourable for investment. They are unlikely to reverse their sales in the short term." And there'll still be tremendous pressure on the UTI. While retail investors remain mute spectators to the market mayhem, trying to figure out what triggered off the chaos—broker defaults, bombs, the budget or the rupee.