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1 Year of Modi Govt: Why did the initial bull run in the stock market give way to the bear market?

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1 Year of Modi Govt: Why did the initial bull run in the stock market give way to the bear market?

As soon as news of the BJP government’s landslide victory in the Lok Sabha polls was declared and in essence after Narendra Modi’s ascension into the Prime Minister seat, the stock market rose to a record high gaining 1,470 points. It had crossed the 25,000 points mark and in terms of market capitalisation, investor wealth increased by a huge Rs.1 lakh crore to end at Rs.80.64 lakh crore. The NSE too hit an all time intra-day high and crossed the 7,500 mark.

The major surge in the markets were due to heavy investment received from foreign institutional investors (FIIs) who pumped in Rs.1,60,000 crore in the Indian equity and debt markets between May 16 and November 12, 2014. Out of this the equities market got Rs.50,600 crore in comparison with the same period in the previous year which saw a net FII inflow of Rs.24,471 crore. The BSE Sensex, the benchmark index rose by 32.49% to reach 28,008 points till November 12 and was one of the fastest growing markets in the world. Brasil’s Bovespa and France’s CAC 40 in comparison were up just 4.24% and 0.40% respectively during the end of 2014. Similarly, UK’s FTSE 100 was down 1.35% and Germany’s DAX was down 0.33%. Even during January 2015 the bull market seems to have been in motion as the stock market kept rising.

It definitely seemed that Modi’s promise of “less government, more governance” and more pro-market policies and reforms were something that was working. However, how is it then that the best performing market in world turn out to become one of the worst performing markets in a matter of a month? All of a sudden FIIs which had a cumulative investment in Indian stocks of about $300 million at market value have decided that India’s is no longer a preferred market. The FII net outflows since a month have been to the tune of Rs.12,500 crore and the stock market has seen one of the biggest correction of 10% in a short span. This has even prompted speculation of a bear phase hitting the markets again though market experts say that a bear phase occurs when the market see an at least 20% correction.

Though market experts may allay fears of a downward turn in Indian markets, it does not augur well for domestic investors that India is one of the worst performing markets this year among the emerging markets. The Nifty has fallen by close to 3% till mid May this year, while other markets such as Brazil’s Bovespa increased by 17%, Russia’s MICEX increased by 17% and China’s Shanghai Composite Index increased by 23%.

So what are the reasons for this sudden turn of fortunes for the markets and why is it that FIIs interest in the Indian market has been reducing? 

One of the main reasons for this is the Modi government’s not being clear on the Minimum Alternative Tax imposed on FIIs, with Finance Minister Arun Jaitley musing on whether or not to impose the tax. However, the issue is now being referred to a committee to look into it, but the damage has already been done.

What has made the FIIs pull out of the markets more faster is the weak results of many companies and sectors which did not do much to bode well with the image of a flourishing economy. In a previous article we had seen that many of the key sectors needed for the economy’s growth this year had in fact seen sluggish growth. The reason for which has been a policy paralysis of the Modi government in implementing important reforms and policies which were needed to unleash growth in these sectors. This coupled with also the fact that as crude oil prices started to increase since last month which brought about renewed interest from FIIs in oil producing countries such as Russia and Brazil, which they had shifted from earlier since oil prices had halved previously. The Modi government also had a stroke of luck during the end of last year and the early part of 2015 as oil prices remained subdued as well as stringent measures taken by the RBI such as no interest rate cuts had brought inflation under control. This further helped stroke back optimism into the Indian economy and prompted FIIs to pump in more funds.

Apart from this is the fact that recently India was prone to volatility in the currency. This is something that impacts FIIs as it affects the level of returns they get. This will also dissuade other FIIs to invest their money in a country’s market where the currency is expected to see a further dip in the coming months. 

It is no wonder that international commodities trading, hedge fund manager and Chairman of Roger Holdings Ltd., Jim Rogers who is based in Singapore said in an interview with a media publication that he getting disillusioned by India because the Narendra Modi government has been all about talk and no action. In the interview he had said bought shares in India because of the new government. “So far, the new government has done nothing but talk, and it is a shame because Modi had experience; he said he knew what needs to be done. He campaigned for many months saying he knows how to fix India, but he has done very little. Cleaning toilets is wonderful, but as far as building the economy or changing India (goes), he has not done very much. I still own Indian shares, and I wonder if I should continue holding, because, after a year of no action, you begin to wonder if anything is going to happen,” said Rogers in the interview.

This sentiment was also reflected in an Economic Times survey of Top CEOs which found more CEOs who were earlier ecstatic of the arrival of the Modi government and the feeling is now replaced by a grim acknowledgement of the realities of doing business in India. So it remains to be seen if the Modi government can turn this frown upside for not only the FIIs that brought in large amount of investment but also the business back at home in India.                     


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