All Dalal Street Eyes on New Delhi Now

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The DMK and Cyprus jitters are over. What matters is whether the Centre can sustain its reforms

Indian stockmarkets, sustained more by inflows of foreign funds than by flows of positive domestic news, fell 3 per cent in the week of the DMK’s pullout from the UPA Government in New Delhi. But that was not the only reason for the slide in stock prices. Global jitters caused by uncertainty over Cyprus’ continuance in the Eurozone reached Indian trading terminals as well. For all practical purposes, it was a double whammy.

Indian stockmarkets appear to have regained their composure since then. India’s Government does not seem in immediate peril and Cyprus has got itself a bailout deal that keeps its banking system afloat. Now that it is clear there have been no catastrophic consequences, it is possible to pretend that nothing happened. For many market players, however, the rollercoaster ride was an opportunity to execute some clever trades. Remember, money can be made on any sharp movement in equity prices, either up or down.

But then, opportunistic trades are not the only kind there are. Some investors have an ear out for the latest on India’s performance prospects. According to Phani Sekhar of Angel Broking, market players are keen to test the reformist impulses of the Government under changed circumstances. Their main concern right now is whether the UPA has the ability to sustain reforms, now that its majority in Parliament is precarious. What may compound this problem is a possible pre-election lull in governance. “Some volatility is going to stay in the Indian market,” says Nirupama Soundararajan of Ficci.

Observers feel that Government actions will determine which way market indices go. Global signals count, of course, but not as much as they did just until a few months ago. Vivek Sharma of Ernst & Young says that the positive correlation that Indian markets had with Western indices till December 2012 seems to have weakened since mid-January this year. Indian indices have failed to keep up with their foreign counterparts. While India struggles to revive its economy, and bears the strain of high inflation, poor savings, low investment and an unsustainable current account deficit, America’s growth prospects are a little better than they were last year. The US also appears to be at the end of its recessionary phase of super-cheap money, and so inflows of funds from overseas may no longer be quite so voluminous in the period ahead.

All factors considered, unless India manages to turn its economy around, and do so quickly—within a couple of quarters—domestic stockmarkets could find themselves in a prolonged slump.