Shareholder value lost in Indian Stock Markets

The Indian equity market continued to slide in September 2008 with the S & P CNX NIFTY, registering its second sharpest fall since January 2008, declining around 10 per cent. It is estimated that Rs 2.3 trillion of shareholders’ wealth eroded in the background of the situation in the US financial markets.

On the contrary, the fall in the US markets was lower with the S&P 500 and Dow Jones both declining by around 9 per cent and 6 per cent respectively, while emerging markets lost around 18 per cent during the month. Pessimism in the financial markets following the filing for bankruptcy by Lehman Brothers, Merrill Lynch’s sell-off, the bail out of AIG and perceived uncertainty around the US bail-out package added to investor fears. Investor sentiment was also affected on news of the possibility of Fortis filing for bankruptcy, indicating problems in the European financial markets as well.

Commenting specifically on the Indian equity markets, Mr. Chetan Majithia, Head-Equities, CRISIL Research elaborated, "The BSE Realty Index and the BSE Metal Index were the most severely affected during the month dropping by 32 per cent and 25 per cent respectively. Concerns over slowing demand in the real estate market due to a liquidity crunch and increased cost of funding weighed in on investor sentiment in the realty sector. Expectations of lower demand for
commodities given the weaker global economic growth affected metal sector stocks.” The FMCG and Oil and Gas sector indices, however, outperformed the overall market, declining 1.6 per cent and 7.6 per cent, respectively.

Moreover, although inflation numbers were in line with CRISIL estimates, the reported 7.1 per cent growth in Index of Industrial Production (IIP) for July 2008 bettered expectations. However, this failed to provide any positive trigger for the market. For the first two weeks of September 2008, the headline inflation appeared to have stabilised at around 12.10 per cent as against 12.49 per cent in August 2008. While a 15 per cent decline in average crude oil prices during month provided some reprieve, the impact was partially negated by the 7 per cent decline in the value of the rupee against the dollar. Going forward, rising crude oil and food prices are expected to keep an upward pressure on inflation.

Further, global liquidity pressures affected FII investments in the country, adding to the weakness of Indian markets – during the month, net sales by FIIs were to the tune of Rs 82 billion. Mr. Majithia added, "Going forward, we expect the market to remain range-bound. Though developments in the US will be closely monitored, the focus would shift to domestic cues with the second quarter results most likely to dictate the course of the market in the coming month."

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