May 27, 2013

government's fixing of the stock market

It never fails to amaze me how finance ministers of our country only want the domestic equity market to keep rising.. forever..

Here is an editorial I wrote, on a related issue, in the newspaper I work for presently:

Let the stock market be

Growing government impatience with even small market corrections is a severe setback for free markets

It is not the first time, and unfortunately it does not look like it will be the last, that our finance minister has intervened with stern remarks against equity market traders when there is the occasional scary fall taking place in the stock market. So, on Thursday morning, when there was a series of small meltdowns rocking Asian markets, including our own when it opened for trading, our current finance minister, P Chidambaram, rushed in to admonish market traders for hitting the panic button in what he evidently thought to be in a mindless manner. "The Indian market should read the situation correctly rather than be influenced by something happening elsewhere," is how this admonishment came from the country's finance minister at a hurriedly press conference on a day when Japan's equity market went into a tailspin with a four per cent fall by around the time the Indian stock market opened for trading. 

It is noteworthy that by this time other Asian markets had not fallen as much, with their declines being around 1-2 per cent only. These eastern markets typically look at how the western-most US market fared the previous day and what they saw was 1.7-2.1 per cent fall in US equity indices in the latter half of Wednesday. While Ben Bernanke's statement that if the US economy maintained momentum the US Federal Reserve would scale back in its monthly $85 billion bond buying program was the primary trigger, the Asian markets were also reacting to domestic events such as a sharp rise in Japanese government bond yields or Chinese. Even the Indian equity market opened low and had fallen by just 1.7 per cent by noon. 

Except for Japan's equity market, Asian markets, including India's, were not exactly crashing. Which is why it was surprising to observe the hasty intervention by our finance minister who one is to assume is a very busy man. But more perplexing was his admonishment that Indian market should not be influenced by something happening elsewhere. 

Chidambaram had himself opened his February 28 budget speech with this: "I shall begin by setting the context. Global economic growth slowed from 3.9 percent in 2011 to 3.2 percent in 2012. India is part of the global economy: our exports and imports amount to 43 percent of GDP and two-way external sector transactions have risen to 108 percent of GDP. We are not unaffected by what happens in the rest of the world and our economy too has slowed after 2010-11." 

So, clearly the FM does not expect the  country's economy to stay unaffected by what happens in the rest of the world but he expects the country's stock market traders to not get influenced by happenings elsewhere. 

Finance ministers of our country have never lost sleep during bull runs in the stock markets. Towards the end of 1991 when the market was in the grip of bulls which included the  scamster Harshad Mehta, the then-finance minister, Manmohan Singh had remarked that he did not lose sleep over stock market movements. But even during bull runs the markets need to take a pause and inhale some breath. Instead of scolding them like a school principal the finance ministers would do well to welcome market falls and corrections today or else they stand a chance of having to tackle scam-like bust ups in the markets tomorrow. Growing intolerance for even small market fall such as the two per cent fall we saw last week does not augur well for a free market economy, now does it.

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