International Journal of Management (IJM), ISSN (Print), ISSN (Online) Volume 1, Number 2, July - Aug (2010), IAEME

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1 International Journal of Management (IJM), ISSN (Print), ISSN (Online) Volume 1, Number 2, July - Aug (2010), pp IAEME, IJM International Journal of Management (IJM), ISSN (Print), ISSN (Online) I A E M E RECENT FALL IN INDIAN STOCK MARKETS: A CASE OF GLOBAL INTEGRATION OF FINANCIAL INTRODUCTION: MARKETS: K.V.Marulkar Assistant Professor, Department of Commerce and Management Shivaji University, Kolhapur Stock market has now become a news item since every fall or rise either small or big gets the coverage in the news at national or even local media. Everyday, we come across the popular indices of stock exchanges namely SENSEX or NIFTY falling down or rising up. These fluctuations take place due to number of factors internal as well as external. But what we have observed recently, is the sharp fall in the values or prices of shares the world over. The causes for this fall are not merely the local or indigenous; but more important reason is the weakness in the capital markets in the globe in general and in USA in particular. The present paper tries to emphasize on the significance of weakness in the global capital markets and its adverse impact on the Indian capital market. THE BACKDROP: ABOUT INDIAN STOCK MARKETS Indian Stock Markets have a history of more than 130 years. Comparatively, the Indian stock market is not as old as other developed markets in the world. But now, India is considered as an attractive destination for the global investors. The growth of Indian economy, even if not too rapid, is constant. Therefore, India is looked as one of the Asian giant and very soon it is likely to be amongst the top markets in the world. The stock exchanges in India started in the year 1875 with the inception of Bombay Stock Exchange. But the manner of transaction which were taking place in the stock exchange, was totally different. Initially, few brokers started the trading in the stock exchange. This was not a formal or regulated way of trading. It started under a tree where now a historical building of Jijibhoy Tower is established. In the early phases, the other stock 98

2 exchanges were established in the big cities like Ahmedabad, Chennai, Delhi and after the second world war, there has been an enormous increase in the trading in the stock exchanges. In the last decade of 20 th Century, the policy of liberalization, privatization and globalization was announced and that increased the pace of growth of capital market even further. During the same time, Securities and Exchange Board of India (SEBI) was also established to protect the investors rights and to regulate the functions of the stock exchanges in the country. Thus, it can be clearly understood here that, even though the history of stock exchanges is as old as 130 years, still most of the important developments have taken place during last 20 years only. Now, considering the ability of Indian markets, more and more money is being pumped in by the foreign institutional investors. This money has been also called as a hot money as it has an ability to fly from one country to another. Since toady, India is a better market for foreign investors, they are pumping their money in India tomorrow if another attractive destination is identified by them, the money which is coming in to Indian markets would easily be transferred to the another market. But still we can not ignore at this stage that in the years to come, India can fulfill the expectations of the global investors and remain as an attractive destination. OBJECTIVES OF THE STUDY Considering the importance and impact of the globalization policy on Indian markets, it is imperative to note that the money coming in and going out of the Indian market is also having impact on the local investors. Whenever there is inflow of funds from foreign institutional investors, the market goes up and local investors also intend to invest in the stock markets. But it can happen that the same money can go out of the Indian market if the money finds a different attractive destination. This creates a panic in Indian markets and the indigenous or local investors are badly affected by this phenomenon. It is therefore important to study whether the Indian markets are affected by the flight of funds from Indian markets to elsewhere and if yes, to what extent. In this case are we really having the strong economy with strong fundamentals? The present paper tries to emphasize on such questions and tries to find out the relationship between 99

3 the recent fall of Indian stock markets and the global integration of the market. The specific objectives behind this paper were as follows: 1. To find out the impact of global cues on the Indian Stock Markets 2. To find out how the globalization is contributing to volatility in markets. HYPOTHESIS The present paper throws light on the recent fall in the Indian Stock Markets. It also tries to come out with possible causes of this fall. One of the causes may be global integration of the financial markets and considering this particular phenomenon, the hypothesis which has been formed is: The recent crash in the stock markets world over is an example of the integration of financial markets world over. Due to the recession fears in the US, there has been a panic in the markets and even the better performing markets have also participated in the global meltdown of the stock markets. GLOBAL FINANCIAL MARKETS Global financial markets consist of various submarkets such as capital markets throughout the world, money markets, mutual funds and debt funds. Among these, capital markets (popularly share markets of the world) are more famous than other forms of global financial markets. When it comes to a global capital market, New York Stock Exchange (NYSE), NASDAQ from the USA, Frankfurt (Germany), Tokyo (Japan), Shanghai (China), Bovespa (Brazil) are few of the markets where the capitalization is higher and there has been wide spread about these markets. The equity markets mentioned above are more popular than the money markets. As far as money markets are concerned, London money market is looked as the most developed money market in the world. Similary we have mutual fund market and debt fund market which support the development of other markets like capital market and money market. Equity markets deal with long term securities while money markets deal with short term securities. Mutual fund industry has different schemes and accordingly some gilt funds or liquid funds are components of money market while equity and diversified (mutual) funds are players of the capital market. Debt funds also deal in medium term securities. Eventhough there are several aspects about global financial markets, this paper tries to emphasise only on the equity or capital markets. The reason behind this is that, the 100

4 institutional investors invest their funds into the equity markets because they expect higher rate of return in equity markets than debt/money market or mutual funds. INDIAN MARKETS: HOW FAR DEPENDENT ON THE GLOBAL MARKETS? The global markets are now seem to be integrated. The fact that a sudden crash in the US financial markets also has a negative impact on other European markets as well as on the other Asian markets. The money which has been coming in India since last 3-4 years has resulted into unprecedented increase in the capitalization as well as the indices of the capital markets in India. The index of Bombay Stock Exchange (BSE) popularly known as SENSEX has gone up from just 7,000 points to almost 20,000 points in the period of just five years. This fact is particularly relevant because prior to the year 2000, the increase in the indices was limited. Even the index for National Stock Exchange (NSE) which is popularly known as NIFTY gone up crossing 5,000 points which was hovering around just 2,000 points during the initial years of this decade. One of the major reason for such a sharp increase that we have experienced here is that a lot of inflow of funds into the Indian stock markets. At the same time there has been increase in the US market indices or European market indices also but the pace of the increase in these markets was steady. The money which was invested into the Indian markets, was coming from these developed markets through foreign institutional investors. It has already been proved earlier also that whenever these FIIs put their funds into Indian markets, the market goes up. The same thing has also happened with other emerging markets like China, Brazil and Russia. Another important observation is that the domestic investment which is taking place through individual investors or through mutual funds in Indian markets has also the impact on these indices. But when the large flow of funds comes into India, then only individual or retail investors invest into the stock markets. Mutual funds houses also have been doing the same thing. All this has been proven earlier also. Recently, the US Government declared its fear of general recession in the economy. The immediate reaction of the US markets was a sharp downslide in the indices of the stock markets in the US. Since the money invested by the US investors in their country resulted in loss, these investors turned to the 101

5 money invested by FIIs in other countries. That resulted in outflow of the funds from emerging markets which finally resulted into the crash in emerging markets also. This is a perfect case of global integration of the financial markets world over. Since the US is still leader in the world markets, its impact can easily been seen on the other markets. To illustrate it further following table provides the data relating to the collapse in the stock markets throughout the world during the month of January, Country/Stock Exchange Name of the index Fall in the index recorded in January, 2008 USA-Dow Jones Dow Jones 21 % Japan Tokyo Nikkei 19 % Brazil Bovespa 18 % Mumbai - India Sensex 19 % Hong Kong Hang Seng 17 % South Korea Composite 18 % It can be clearly understood from the above table that the financial markets world over and to be specific, capital markets world over, have reacted to the fall of the US markets during the month of January, It we try to find out the possible causes of this global meltdown, we get the interesting observations. Some of these observations have been elaborated here. FACTORS CONTRIBUTING TO GLOBAL MELTDOWN 1. Recession fears in the US: There has been a feeling of general recession fears in the US economy. The GDP growth expected during this financial year is not healthy and apart from that, the manufacturing sector throughout the country has not been performing well. The inflation is also high and it is expected to even go up in the near future. This clearly gives the negative indication for the financial markets. 2. Possibility of slowdown in the Europe: What is being happening in the US, the same is true about the Europe also. The European markets are also going through the tough conditions. They are also experiencing pressure from the factors like inflation. There hasn t been a significant positive indication for the market in the Europe and hence European markets are also participating in the global meltdown. 3. Subprime Crisis: The banks in the US are particularly experiencing this crisis. During the first few years of this decade, when most of the markets were firm and were having boom phase, the bank had given lot of loans for real estate. When the 102

6 loans were being given, due to the positive indications from the sector, some sanctions or concession were given for real estate loans. Lateron, when the boom phase was over and economy started showing indication of slowdown, the prices of real estate started falling down. That resulted into the loss suffered by the real estate players (i.e. contractors, developers, brokers). This made the problem of recovery for the banks and therefore, the banks also suffered loss in this activity. Since the quantum of these loans was high, most of the loans were either required to be written off to some extent or provisions were required to be done. Due to this, the profitability of the banks was affected and further the money supply was also restricted. Then they had no option but to pull out the investment from the market and that resulted in selling pressure in the equity markets entailing the crash in the stock markets. 4. The (Short) story of Strong Fundamentals: The emerging economies including India and China were confidently asserting the strong fundamentals in the Indian markets. But interesting point to note here is that, the US markets just signaled regarding soaring inflation and recession and lateron, every other nation started signaling the same fears. Therefore the question which can be raised here is Do Indian markets really have strong fundamentals? INTEGRATION OF GLOBAL MARKETS 1. Liberalization and deregulation in the financial markets : Most of the countries have now accepted the liberalization policy. Some nations voluntarily accepted it and some nations were compelled to do so. But due to deregulation to some extent and especially, due to liberalization, the foreign investment was welcomed by the Governments. This has positive as well as negative angles but this was one of the reason of integration of global financial markets. 2. Activities of the market participants: The market players or components of capital market are continuously in search of better option. The instruments like hedging, swaps and options have given a lot of scope for the market players to remain safe even in adverse conditions. Due to such activities, there has been free flight of the money from one market to another market. 103

7 3. Technological Advancements: The advancements in the technology which have taken place in the last decade have also contributed to this integration. Now since the fact that electronic clearing and settlement, E-trading have become the part of the markets, it is easier for the market players to operate from distant places. 4. Institutionalization: Due to the increasing institutionalization, it has become easier to trade in the large scale. Such huge trades have the ability to determine the pace and give directives to the markets. This has also resulted in high volatility in the markets. The monitoring has also become simpler than the past through this institutionalization. CONCLUSION: WHERE ARE WE HEADING? After elaborating the aforesaid points, it can be clear that if we have accepted the globalization, we can not be aloof from the market trends world over. We can not be the silent observers, but we are compelled to be the players in the market. Therefore, we have no option but to participate in the global meltdown in the markets. It has happened in January 2008 and it may happen in the days to come also. But then what about the strong fundamentals which we possess? When the markets were climbing and passing milestones one after another, we had strong belief on our fundamentals i.e. cost effectiveness, competitiveness, other financials etc. Hence, it can be concluded that even if we are firm about our fundamental strongness, still, if we are globally integrated, we have to be a part of the market trends of the world over. We can not go behind and revert the globalization policy because we also had some positive signs of the policy and therefore we are left with participation in the global trend and the recent fall in the stock exchanges of India is a classic example of this integration. 104

8 REFERENCES: 1.Books Kulkarni P.V. (Business Finance) Kuchchal S.C. (Corporate Finance) Pandey I.M. (Financial Management) Avadhani V.A. (Indian Financial System) 2. Periodicals Indian Journal of Finance (Various Issues) The Economic Times (Various Issues) Business Standard (Various Issues) 105