The current slump in the stock market can easily be understood from the movement of the Sensex since the election results. From its closing level of 12,173 points on 15 May, the Sensex shot up to 14,284 on 18 May, the first day of trading after the results. By early June, it had moved up beyond 15,000. But that was followed by a pull-back. It then made one last sharp move up just before the day of the Union Budget before collapsing. It is now well below its closing level on 18 May.
Illustration: Jayachandran / Mint
There’s a clear logic running through the ups and downs of the market since the elections. Stocks rallied sharply on the election results not only because the market was relieved thinking that the new government would be a stable one, but also because investors believed that without the Left breathing down its neck, the government would go ahead with reforms. That hope led to the Indian market outperforming most other markets during this period. It also led to the Indian market trading at a premium to its peers, the expectation being that the premium would be justified by the reforms that the government would undertake. To take an example, one of the reasons for India being out of favour with global investors used to be that since its fiscal position was stretched, the government would not be in a position to provide an additional boost to the economy. But once the new government was elected, the markets hoped that policies such as disinvestment and the sale of telecom licences would bridge the fiscal gap to some extent, allowing the government to focus on infrastructure spending, while other reforms, such as relaxing the limits for foreign direct investment, would lead to the Indian market becoming more attractive.
Together with the signs of improvement in the economy and a revival of risk appetite globally, the upshot was a re-rating of the Indian market, enabling it to outperform other emerging markets.
Since the middle of last month, though, the rally in the global markets started petering out. The Indian market also started to correct, probably realizing that it had gone up too far too fast. But the bulls gave one final push just before the Budget, hoping that the finance minister would at least paint a rosy picture on issues the markets like hearing about, such as foreign investment and disinvestment. Now that the Budget has not only been a disappointment, but has in fact increased risks because of its high fiscal deficit, the Indian market’s premium to the others is fast disappearing.
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