BUSINESS & ECONOMY

Chronicle Of A Death Foretold

Black Friday causes a Sensex freefall. VEESHAL BAKSHI and SHANTANU GUHA RAY track the
storm’s path and its effects on the country’s best scrips

TWO KEY ministers of the United Progressive Alliance stayed back late Friday night in office to tale stock
of the Sensex’s second- biggest single day crash. One of them, Commerce Minister Kamal Nath, went on
a hyper file-signing spree and squeezed more people onto to his appointment list — the last person came
in at 9.20 pm — and then had visitors at home as well.

Finance Minister Palaniappan Chidambaran also showed urgency in extending his capital market
meetings with representatives of the Reserve Bank of India (RBI) and the Securities and Exchange Board
of India (SEBI). But otherwise, his Friday schedule was routine.

Nath’s aides felt that the minister wanted to send a message to his adversaries: New Delhi is not
panicking to the tremors of Black Friday, despite the shock of a 1,071-point, or 11 percent, fall by the
Sensex. It closed at 8,701 (an overall crash of over 12,000 points, or nearly 60 percent, since its 20,873-
peak on January 8, 2008). To those who still persisted for a reaction, the Commerce Minister merely said:
“There is no need for any panic. The rupee slide is an aberration. It is weakening because of capital
outflows by foreign funds. See the positive side of the crisis. The easiest liquidity available is in selling
stocks in India. This shows how healthy the stock market is and how easily the institutional investments in
India are converted into liquidity.”

There was, of couse, the third one: External Affairs Minister Pranab Mukherjee who was specifically
instructed by Prime Minister Manmohan Singh — currently in China — to intervene, only if matters go out
of the finance minister’s hands.

That, in short, means the markets are far from normal: as brokers panicked, scrips tumbled as if there
was no tomorrow, and India’s top business daily, The Economic Times, wondered whether Forbes would
have a problem in finalising its next list of billionaires from India. “The chances are that many Indian
tycoons will find, to their dismay, that their rankings have slipped a few notches,” said the daily. For the
record, the market cap of almost all companies trading on the Bombay Stock Exchange (BSE) collapsed
by a mindboggling Rs 46 lakh crore, or $940 billion, from January to October.

The Ambani brothers, Mukesh and Anil, were united in their loss: they have borne the biggest losses
between January 8 and October 24. Despite dominating the market cap ranking, RIL chairman Mukesh
Ambani’s personal wealth crashed from $57.6 billion to $14.4 billion during this period, a loss of 75
percent; younger sibling Anil saw his wealth plummet from $48.4 billion to $8.4 billion, a loss of 83
percent. The third biggest loser was real estate major DLF, whose promoter KP Singh’s wealth eroded
from $44 billion to as low as $6 billion. The Tatas were next: their wealth in 27 listed companies plunged
from $38.2 billion to $12.8 billion, a loss of 67 percent.

Core to the crisis was the maddening withdrawal by foreign investors and the weakening of the Indian
rupee to a record low against the dollar. Foreign investors have pulled $11.96 billion from Indian
stockmarkets this year, $2.84 billion of that in October alone. This is because the collapse of hedge funds
mechanisms across the world, beginning with the US, spread to emerging markets such as India.

The real dumping of stocks in a panic at any price started a few weeks back. This triggered redemption
pressures in mutual funds in India, because they were forced to sell their holdings, though disinclined to
do so, because they had to fund redemptions. “I would say capital will return only when the crisis
stabilises in about three to four months,” says Agam Gupta, head of trading at the Standard Chartered
Bank in Mumbai.

Some corporate rivalries are also being settled in the turmoil: ICICI Chairman KV Kamath openly accused
vested interests of hammering his bank’s shares through short sales. The latest FII data with SEBI also
shows that FIIs borrowed shares of large cap companies and short-sold them in the cash segment. SEBI
has now directed these FIIs to reverse their positions by purchasing these shares again from the market,
but this intervention has come too late in the day. Some of the shares ruthlessly hammered through this
route include ICICI, Reliance, Reliance Capital, Educomp, DLF, Jaiprakash Associates and Indiabulls
Real Estate etc.

FOR NEW Delhi, foreign investment is crucial not only to develop critical infrastructure, but also to keep
demand for the rupee high to offset the rise in imports from high consumer demand. So far, the rupee has
depreciated 26.5 percent against the dollar this year and breached the psychologically important level of
Rs 50, possibly falling as far as Rs 55. The sharp depreciation this year contrasts with its 11.2 percent
rise against the dollar last year.

Interestingly, while a weak rupee helps big Indian technology companies that export computer services,
the impact in the market has been the opposite, because one reason for the rupee's weakness is the
rapid withdrawal of foreign investment from India's once-hot stockmarket. The drop also surprised the
technology sector, vulnerable to currency fluctuations.

For example, some companies had hedged for the rupee to drop below 45 to the dollar and those bad
bets are now taking a toll on tech companies’ profit: Tata Consultancy Services Ltd., India's largest
outsourcer by sales, lost Rs 2.6 billion (about $52.2 million) on hedging positions in the quarter ended
September 30. That loss helped a rise in net income of Rs 12.71 billion ($260 million) or just 1.5 percent
from the year-earlier quarter. Financial analysts say if the hedging losses were not there, profit would
have actually grown by 21.5 percent.

MORGAN STANLEY economist Chetan Ahya says the dep - reciation also hurts Indian companies that
have taken out loans in dollars. The interest on those loans effectively becomes more expensive following
the weakening of the rupee. “Indian companies hold about $221 billion of such loans,” Ahya told
TEHELKA from Singapore.

There are other areas of concern. Market analysts say the dollar-denominated imports, such as oil, also
become relatively expensive following the weakening of the rupee. Global crude prices have nearly
halved this year. But the drop in the Indian currency has negated much of the benefit the decline in oil
prices could have had, dealing a crippling blow to the nation's beleagured airline industry.

But India was hardly alone in the battering on the bourses: stocks in Asian markets fell across the board,
with South Korea plunging the most. Belarus requested aid from the IMF, joining Iceland, Pakistan,
Hungary and the Ukraine in asking for assistance in weathering the global financial crisis. “Worldwide,
things are not looking good,” says Ajay Bodke, who helps manage the equivalent of $872 million of stocks
at IDFC Mutual Fund in Mumbai.

All the RBI seems to have done, however, is lowered the GDP growth forecast, from 8 percent to 7.5-7.8
percent. Although some analysts are not happy with the situation, others feel the central bank’s role is to
monitor inflation and not help the capital markets.
Says Jagannadham Thunuguntla, head of the capital markets arm of India's fourth-largest share
brokerage firm, the Delhi-based SMC Group, “Adding more liquidity would have added to inflationary
pressures and might lead to more problems for the real economy. There is a liquidity crisis globally and
Indian markets are not immune to that.”

EARLIER, THE Rs 65,000 crore liquidity boosts announced by the government and RBI also failed to
enthuse the stockmarket as heavy sell-off by foreign funds in stocks of banking, metals, capital goods, oil
and gas and power sectors continued to affect them adversely. The question that every investor wants
answered is whether we are close to the bottom? The major psychological bottom was the Sensex at
8,799 points — that has been comprehensively breached. Although it’s difficult to predict a floor now, the
fact is that the market is attractive now for long-term investors, as shares of blue chip companies are
available at throwaway prices: Reliance Industries is down from Rs 2,000 to Rs 1,000 in barely 16 trading
sessions.

Still, if the markets don’t revive quickly and liquidity continues to remain tight due to the reluctance of
banks to extend loans to the corporate sector, industrial growth could slow down. This will affect
production, employment and finally the economy’s growth. But with no rate cuts announced in the credit
policy, and banking stocks reeling under selling pressure, analysts fear things could get worse before
they can get better. •