The year 2008 is only two-and-half months old but it has already created a new record for the country’s stock market. Of the top 10 single-day losses in the Bombay Stock Exchange's Sensex, seven took place in 2008. After several large drops Sensex now stands at 14,833, a good 30 per cent lower than its all-time peak of 21,282 reached in January. As indices have crashed, millions of investors have lost hundreds of crores in a short time. Since large blue chip companies and strong midcap companies have shed their market value the most, investors who reposed their confidence on strong fundamentals are badly shaken. The confidence level is so low that even major cut in personal income tax announced in the budget did not make any difference. Worse, no one knows when the carnage will stop. Doomsayers are already predicting that the Sensex may tumble to 12,000 or even lower.
They cannot be blamed for their pessimism. Things are really scary because United States, the world’s largest economy, is in deep financial crisis. It all started with the subprime crisis or mortgage crisis that began in the USA and slowly engulfed Europe. The crisis is actually the result of a financial engineering where borrowers with lower creditworthiness were given generous loans by banks. These loan portfolios were sold again and again to other investors through securitisation. But the artificial boom created with easy money went bust when the property prices in the US crashed and borrowers started defaulting. Almost all large banks and financial institutions in the USA and many in Europe are facing liquidity and credit risk. The estimated loss is $ 600 billion and may touch $ 1,000 billion.
The question is if American banks and financial institutions have messed up big time with huge leverage, reckless investments, lousy risk management and massive underestimation of liquidity risk, why should Indian investors lose money. The answer, unfortunately, is that when a country is a part of the global village, the economic behaviour of its citizens reflects the global mood: now the gloom. Many of the troubled banks and financial institutions are also large investors in the Indian market and are now pulling out their money. Add to it the bad news from within the country. Recent news suggests that the GDP growth rate will be lower at 8.7 per cent. Industrial production is growing much slower than before. As bad news piles up, hope is now taking a beating.
