A strong market structure

THE one conclusion that can be drawn from the various reports and mood surveys on the stock markets is that there is no replacement for strong, deep and participative markets. This will enable the stock markets to realise India’s potential fully and guard the markets against panicky over-reactions. It is true that fundamentals are the foundation on which any bull or bear run is built. However, it is also important to reconcile oneself to the fact that stock markets are also influenced by intangible factors such as sentiment and emotions such as greed and fear. These factors can, to borrow a phrase from former Fed chief Greenspan, cause irrational exuberance. They can also cause unreasonable despondence. It is then that deep and wide markets come in handy. A large number of players, with different investment horizons, objectives and opinions can play a role in tempering unreasonable exuberance and despondence.
It is in this context that the reported measures relating to participatory notes (PNs) and monitoring systems to keep an eye on volatile scrips need to be seen. While the more transparent norms relating to PNs need to be welcomed, it would be unreasonable to expect that this by itself would curtail market volatility. Global liquidity continuously evaluates opportunities and flows to the relatively more attractive destination. Therefore, even thoroughly regulated PN money can quickly flow in and move out causing the market to spike or trough. Surveillance measures will detect abnormal movement but will be of little comfort to investors watching liquidity evaporate rapidly in a market downturn. Increasing supply of good quality scrips — say through PSU disinvestments — is one way to attract long-term money and to absorb excess liquidity. Getting more pension fund and domestic institutional money will widen and deepen the markets. India’s stock markets need not be just another typical emerging market.


-- The Economic Times Editorial