Indian Sensex volatility – A lesson in speculation By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

June 10, 2015 | Posted by bobbysrinivasan << back to blog

Mr. Modi was sworn in as the Prime Minister of India on May 26, 2014 after having won a landslide victory. There were jubilations everywhere of his election success and everybody assumed that he will bring about major changes to the Indian economy with more governance and transparency. Money poured into India especially in the speculative stock market. The Sensex index which was 22,227 points on April 1, 2014 touched 30,025 points on 4^th April 2015 a whopping jump of 35%. Since then the index had dropped to 26,527 as of today (8^th June 2015), All the gains made in this one year is slowly vanishing and there is a good possibility that the index may fall back again to 22,000-23,000 level due to global economic slowdown. What has gone wrong? Why is it falling? This is a discussion between a student and his professor.

Student: Professor, as a retail investor, I am a little bit perturbed by the drop in the Sensex index. Is it a foreboding sign of what is to come?

Professor: It is hard to say but one thing is certain. The global economic scenario is murky. The giant Chinese economy is slowly losing its drive to grow rapidly. People are very pessimistic about its future growth. The US economy is also expecting a major economic growth slow down even though the number of jobs created in May exceeded the market expectation (2,80,000 against 2,26,000). Obviously the job creation is in the lower paying jobs.

Student: The Sensex drop in 2015 and the number of days it had dropped more than 500 points makes a retail investor like me to get out of the market as early as possible.

Professor: Yes, of course. Already in the last 6 months the Sensex index had dropped heavily. On January 6m the index dropped 855 basis points (Sensex reading was 26,987 higher than 26,600 today) (On May 6, 2015 it dropped 723 basis points and on May 12 it dropped 630 basis points. On March 26^th it dropped 654 basis points) and last week on June 2 it dropped 661 basis points. One needs to have strong nerves to stay in the market.

Student: What is in store for us?

Professor: Dr. Rajan says that the 7.5% GDP growth rate numbers are misleading. Consumption is down, Corporate results are bad, Investment hasn’t picked and bad loans yet to bottom. Nothing could be more negative than this observation. With the monsoon being affected by el-nino and the precipitation is expected to be much lower than the 93% of average rain fall (current prediction is 88% of the average rain fall of 89 cm). The scenario appears to be scary.

Student: What is RBI doing? Should they not support the market by lowering the interest rate?

Professor: They have lowered the repo rate three times 25 basis points each. The rupee has since fallen to 64.15 to a dollar. The retail investor like you must watch the FII’s activity. If they bail out in a hurry which they are capable of, we can see similar drop in the Sensex like what we saw during the subprime crisis. My advice to you is, if you decide to play the market stay with good stocks over a longer horizon. In the longer run earnings will matter the most. In the short-run sentiment and liquidity will have the highest importance? It must be one tough job being a Prime Minister of a country who is expected to perform after 10 year of UPA mess up. Good luck.

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