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Stimulus, Sentiments and Sensex

December 30, 2008

Almost a week back, I wrote about how markets might ask and respond favourably to a stimulus package, yet it is seldom what it takes to change sentiments. [The post can be found here]

Almost a week and a fierce relief rally later, markets are falling back onto their old lines. Of a bearish bias, that is. So it can be well construed that stimulus packages seldom do any good to the financial markets in the short term. Of course, bailouts do even less but stimulus performs dismally. This begs the question, what do markets demand as of now?

Quite frankly, nothing. Do nothing. Don’t do anything to better the financial markets. It will correct itself, change itself and with time punish anyone more panicky than what is permitted. But it must be realised that, markets are not economies, and the institutions of a country like India need to have a tight hawk eye on performances of economy. This might look like a laissez faire attitude to financial markets, which I will not completely deny. Yet there is more to it than what meets the eye. Free market system has been tainted today because of the absence of a proper governing body which ought to have done its job. For instance, by slashing the interest rates to sub-unity during dot com crash, the Fed belied its own responsibility, that of inflation control. India on the other hand has substantially more aware and proactive institutions. At least in the current era, I don’t see, RBI sacrificing inflation control to boost the financial markets. This was one facet. So the essence is, laissez faire is not bad, but unbridled encouragement to ‘bend ways to make money’ is detrimental to the situation.

Now, coming to the crux, India will do good to itself to release a vice like grip on ‘almost’ every sector of financial, manufacturing and other industries. What effectively, I am looking for is, a more lax approach to the basic drivers of the economy. And hence, calculated, premeditated interest cuts in the wake of recent credit tightening[to fight inflation] is encouraging to the industries which in turn will be good for financial markets in the long term. Hence to consider that markets bottom out immediately after a stimulus package is quite naive by nature.

Now, this brings us to the next question, what do markets need to go back to the old times?

India have lived in a financial bubble in these recent years. No doubt about it. A bubble formed by the excessive credit floating in the world markets. Again, no doubt about it. But a bubble doesn’t form just by liquidity. A bubble needs two things to grow: fundamentals and credit. One might compensate the other, but it’s difficult for one of the legs of a bubble to beat the other consistently. Tulip Bulbs Bubble, South Sea Investment bubble were formed by pathetic fundamentals but sparkling credit. We must remember those were the times of the most aggressive colonial expansions and industrial innovation, thus infusing credit.

Similarly, 2003-2008 was an absolute bubble, in ways of excellent fundamentals and unlimited credit. Hence to start another bull run [or bubble, depending on your bias] government will do good in boosting the industries by firstly, bettering the fundamentals and secondly, deregulating the industry.

Improving fundamentals will require improving infrastructure by at least a degree or two, improving power options, improving environmental conditions and overall encouraging entrepreneurial zeal of ambitious Indian.

Deregulating the industry will require changing the role of policies from that of an opposer of industry to that of an enabler.

India might have got a temporary setback in the recent times, but it is well poised to be a place of next “Land of Opportunities”. But the road is ardous and we Indians ourselves have to fulfil that vision.

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