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Political uncertainty, scandals hit stock market in 1996

C K Arora in Washington

Political uncertainty, caused by electoral defeat of the Congress and a bribery scandal, and economic concerns affected India's stock market in 1996, resulting in losses, though marginal.

According to the International Finance Corporation, the gains made by Indian stocks early in the year were overshadowed by political and economic concerns that dampened enthusiasm for stocks.

The IFC's just-published Emerging Stock Markets Factbook, 1997, says the IFCI (IFC Investible Index Series) and IFCG (IFC Global Index Series) indexes fell two per cent and 3.5 per cent in dollar terms, respectively, while the Bombay Stock Exchange's BSE 200 index dropped 2.7 per cent in rupee terms. Reeling from last year's dismal performance, Indian shares opened the new year overshadowed by general anxiety over weakness in the rupee, it says.

After a slow start, however, the market rallied from the remainder of the first quarter, with foreign institutional investors taking advantage of the weak currency and low stock market prices.

IFC's indexes gained 22.6 per cent in February alone. The BSE announced a shortening of the settlement period for the most liquid stocks, from two weeks to one week, which proved popular with foreign investors.

Despite concerns about the rupee's volatility and the hawala scandal, involving 25 politicians, one of them former prime minister P V Narasimha Rao, it points out, share prices continued their upward movement through the end of March.

Continued interest by foreign institutional investors resulted in solid gains in the second quarter, with the IFC indexes surging about 12 per cent.

It says the positive investment climate centered on optimism that market reforms begun by the then administration would continue after the April parliamentary election.

A cut in the bank reserve requirements implemented by the Reserve Bank of India contributed to market liquidity.

The loss by the ruling party in the parliamentary elections disrupted the upward momentum briefly, but the resulting transition period was resolved when then prime minister A B Vajpayee, unable to sustain his short-lived mandate, resigned as a result of his party's small power base.

It says confidence was restored when the 13-party United Front took control of the government under the leadership of H D Deve Gowda.

Deve Gowda's accession to power boosted the market after he unveiled plans to reduce the fiscal deficit to four per cent of GDP, promote industrial growth and foreign investment and continue the liberalisation process.

Foreign institutional investment, which was largely credited for the phenomenal growth during the first half of the year, was greatly reduced following the release of the new Budget on July 22. Investors felt that the Budget failed to include any clear-cut measures to attract foreign investment.

The factbook says the resulting disappointment was reflected in the total amount of equities purchased by foreigners in the first three weeks of August, which amounted to only $ 27.6 million, compared to the $ 357 million invested in June. With the market in a downward spiral, it recalled, the finance ministry announced several tax reforms aimed at boosting the sagging market. Among them was capital gains tax exemption for mutual fund investments held for at least three years.

This stemmed further losses, along with speculation about a government plan to rescind an unpopular corporate tax levied in July. The IFC indexes fell 19 per cent during the third quarter.

The IFC report, however, says stocks continued to drift in the fourth quarter amid concerns about a slowdown in economic growth and political uncertainty surrounding the arrest of former prime minister Narasimha Rao.

The BSE 200 hit its lowest level in three years on December 4. Stocks were able to rally late in December on news that Rao resigned from his position as the Congress president and due to portfolio reshuffling at year's end by foreign and local funds.

UNI