The majority of trades done on Indian bourses are on stocks for which derivatives trading is available, thanks in part to the leverage provided by stocks futures and options. But just because traders in these stocks benefit from high leverage, it doesn’t necessarily mean that the degree of speculation is the highest in these stocks, or that they are the most volatile.
Consider the movement of the Bombay Stock Exchange’s small-, mid- and large-cap indices in the recent correction. The small-cap index has fallen the most (32.4%) from its 52-week high, followed by the mid-cap index, which fell 25.9%, and finally the Sensex, which has dropped 16.9%. Now, stocks futures and options trading is available on all of the Sensex stocks, 38% of the stocks comprising the mid-cap index and just 2.5% of the stocks in the small-cap index. Also, within the derivatives set of stocks, which hit their 52-week high this year, about 44% fell by more than 30%. But among the 1,873 other stocks that hit their 52-week high this year, more than 78% fell by more than 30%. The damage was evidently worse in small- and mid-cap stocks, with about 100 of them falling by more than 60%. None of the derivatives stocks fell as much.
Excessive speculation and high volatility is certainly not restricted to the derivatives segment. One could argue that the panic selling and at times forced unwinding by brokers in the derivatives segment led to sales in other stocks as well to bolster liquidity. But then these stocks should have gained the most on the rebound, if indeed they had corrected only because of liquidity constraints. The fact that they didn’t suggests that they were significantly inflated before the correction.
Mid- and small-cap stocks have always been more volatile because of relatively low floating stock—it takes far less capital to corner non-promoter stake in a company with a market cap of about Rs50 crore, than say one with Rs1,000 crore worth of tradeable stock. But having said that, it’s interesting to note that some reasonably large-sized stocks on which futures trading isn’t available have fallen more than their peers. Take Motilal Oswal Financial Services Ltd, which has a free float market capitalization of Rs900 crore. This stock has corrected by 57% from its highs in January. Edelweiss Securities Pvt. Ltd, a peer group company that has futures trading on it, has fallen by 51%. Similarly, Videocon Industries Ltd has fallen by 52%, while Essar Oil Ltd has dropped by around 33%, even though leveraged activity has been rampant on the latter in the futures segment. The tradeable stock on Videocon is as much as Rs3,000 crore. This is certainly not to suggest that speculation has been lower in segments where leverage is available, but it does make the point that speculation can be rampant with or without leverage.
A depreciating rupee? A blessing for some, curse for others
The year 2008 has started off on a good note for exporters, with the dollar breaching the Rs40 mark on Wednesday. The depreciation is nothing to write home about, with the rupee down around 1.2% against the dollar since 1 January this year, but it’s a big respite from the sharp appreciation seen last year.
Moreover, the respite is not because of dollar weakness alone—the rupee has also depreciated by a similar amount against the euro.
But apart from its movement against major international currencies, the rupee has also gained against the currencies of some of our close competitors. For instance, the rupee has depreciated against the Chinese yuan by 3.3% this year.
For Indian exporters, who were earlier complaining bitterly about how the Chinese pegged currency made it difficult for them to compete, this should be reason to feel happy. The rupee has also depreciated against other regional currencies such as the Indonesian rupiah, the Philippine peso, the Taiwanese dollar and the Malaysian ringgit.
The question is: Can the depreciation be sustained? Partho Mukherjee, treasury head at Axis Bank Ltd, doesn’t believe so. “I expect foreign institutional investor (FII) inflows to resume soon, attracted by the reasonable valuations in the market,” he said. Mukherjee sees the rupee appreciating to 38 to the dollar by the year-end.
The key question is how soon FII inflows will resume. Oil prices too have moved up sharply and if they remain at these elevated levels, the rupee could come in for further downward pressure.
But A. Prasanna, economist at ICICI Securities Ltd, said that the balance of payments is always in better shape in the fourth quarter, due to a seasonal effect. That should limit further rupee depreciation.
What will also be very important is the Reserve Bank of India’s (RBI) stance. Prasanna said RBI has been buying dollars in recent weeks, taking advantage of the absence of FII inflows to drive the rupee down.
The dollar shortage in the market in recent weeks and the fact that the growth in net foreign exchange assets of RBI continues to accelerate, is testimony to that. Companies have been buying spot dollars and selling in the forwards, leading to discounts in the forward market.
Data shows that the year-on-year (y-o-y) growth in net foreign exchange assets of RBI has been steadily going up. Y-o-y growth was 40.3% as on 2 November 2007, after the huge FII inflows at the time. By 7 December, growth had fallen to 37.7%. However, it has moved up steadily since then to 40.1% by 11 January this year and to 41.2% as on 8 February. Dealers say that the fact that RBI has continued to buy dollars at a time when FII flows have turned negative is an indication that it wants the rupee to depreciate.
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