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Home > Business > Business Headline > Personal Finance

Political volatility and the stock markets

May 26, 2004 12:22 IST

Who would have ever thought that India would have Dr Manmohan Singh as prime minister, and Laloo Prasad Yadav as railway minister? Who could have foreseen a situation where politicians will refuse to accept ministerial posts (for whatever reason)? And two people will be given the same ministry and office?

This is what coalition politics is all about. But be prepared for more.

After what seemed to be an endless 'debate', India finally has a prime minister, and an army of a ministry. So far, 67 ministers have been sworn in. Every eighth Member of Parliament is now a minister. Another statistic -- approximately every third member of the ruling alliance (excluding the Left Front, which is supporting from the outside) is a minister. Be prepared for more.

What has however come as a surprise is the appointment of P Chidambaram as finance minister. Given that Chidambaram, who presented what is now referred to as the Dream Budget of 1997, has surely raised expectations of investors.

Below are some statements from his first interaction with the press after his appointment:

"All economies in the growth mode, will have to promote investment, both public and private. We will find the money for public investment."
"It will be my endeavour to promote investment, which I believe is the key to growth, to jobs and to incomes."
"We will work very hard and we will redeem the promises made to the people during the course of our election campaign."
"We want India to shine, but that can only happen through good economics, good politics, and hard work."

Simply put, the finance minister made the 'right noises'. Deservedly, the welcome salute was in the form of a 3 per cent gain in the market or an addition of about Rs 300 billion (Rs 30,000 crore) to investor wealth.

To put this in gain in perspective it is essential to look at it in the backdrop of the carnage that the markets witnessed recently.

This gain comes after the markets had corrected 1,500 points on the BSE (a loss of about Rs 3,000 billion or Rs 300,000 crore!)

Coalition governments are here to stay and it is best that we prepare ourselves for a lot more surprises and, therefore, volatility in the markets.

A case in point is the recent fall in the stock markets that was triggered by statements made by members of the Left Front, which was then expected to join the government.

But the Left Front decided to stay out of the government (thank God!). The Congress made amends. And the result was a 500 point rally (approximately).

Coalitions tend to be unstable, as we have seen in many instances at both the central and state levels. With the exception of the National Democratic Alliance that can perhaps be termed as stable in the latter years of its tenure, other experiments with coalition governments have met with little success.

Any indication of a dilution in the majority of the Congress-led coalition can, and probably will, have serious implications for the stock markets.

Our advice to you:

  • Be prepared for a volatile political climate. And a volatile stock market.
  • Invest rationally and opt for an investment plan where you invest money at regular intervals, thus diluting the risk of bad timing.

Rated as one of India's leading portals, Personalfn is focussed on providing independent value-add research and tools for making better financial decisions.

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