Should Governments get into a tizzy over falling capital markets?

We have seen governments from lot of countries, especially US and off late even India, trying to talk up the stock markets.
This could seem very elitist than populist, specially for those of us in India. We have been bred on leftist talk about capital markets being elitist (or should I say 'capitalist'). While in the US, almost all households have stock market investments, including retirement accounts, in India, only a fractional percentage of Indian domestic saving is channeled to the capital markets. And only recently some thaw is seen in regulation allowing PF retirement funds to be privately managed, not sure if they would be allowed capital market entry though

Last couple of weeks Mr. PC (Hon'ble Finance Minister) has given some peppy wordbytes on a daily basis.

"Don’t sell in panic"



“Investors must take informed decisions. Before you sell, you must remember that for every seller there is a buyer. You must ask yourself why the buyer is buying in these times of perceived uncertainty and, therefore, ask yourself the further question whether there is a need to act in haste or in panic. In my view, there is no reason at all to act in haste or to give room for panic.”

Compare this to Harshad Mehta time when Mr. Singh and PC were responsible for comments like

"....would not lose sleep over the daily movements in stock market"

"....capital market is as important as Khan Market (an up-market shopping centre in Delhi)."

So is it worth Government of India time to try and talk up the market?

I think it is.

Remember, stock markets are an important avenue for entrepreneurs to raise long term money from. It's an important vehicle for funding economic growth. Remember India does not have a vibrant long term bond market, nor does it have a strong venture capital base (I doubt private equity funds will look at emerging markets for a long time).

So many projects have been shelved because the money for these projects was supposed to come from IPOs. Reliance Power was the last one to squeeze through. Its been uphill since then. There are absolutely no takers even for well-priced rights issues - Hindalco, Tata Motors and Suzlon would concur. With credit markets seizing up and stock markets crashing, where is credit (blood for economic activity) going to come from? Result - Faltering economy

Even though India may not be directly affected by the sub-prime crisis, we are definitely affected by its by-product - the credit freeze. I am afraid, this is definitely going to cause a slowdown. While banks may not go down, I am not sure about some of debt mutual funds, I read an article in ET today where Kamath (ICICI) is saying mutual funds have lent out over 630,000 crore (!), lot of it to real estate sector, and if there are redemption pressures, its going to cause problems. No wonder, RBI has opened a temporary funding window to them too.

Global plans of so many entrepreneurs are on hold due to non-availability of credit, and those with existing foreign debt exposure will have a double-whammy of

- Falling rupee (This could be another reason for FM's talk, to slow down FII selling, putting lot of pressure on the rupee)

- Difficulty in rolling over existing debt

Where do we go from here?
I don't think last week's rally signified the end of the downturn, I am sure we will see lower valuations again. RBI cut some repo and CRR rates again this weekend, do I see that as a glass half-full (things will now improve) or glass half-empty (RBI is getting worried about the economy, things are worse....). I think we will see a rally at least beginning of Monday's trading. Rest of the week will be dictated by global cues.

Luckily, from what I read, there are not too many panic redemption seen in mutual funds, however I doubt strong inflows are seen. That places mutual fund houses that are sitting in piles of cash in a good position. Fund houses like Reliance and Sundaram have been sitting on around 25% cash since Jan, and have been deploying them slowly. Expect these funds to show marginal out performance over the rest (assuming they don't keep on sitting on it, but deploy it at a good time)

Economy
I am worried we might have frittered away last few years of robust tax collections in subsidies without seeing any structural changes in the economy. Infrastructure pains remain - partly contributed by land acquisition problems (long live democracy)

Remember the jokers in the pack - Indian general elections, Raj Thackrey (some one please talk sense into this guy), and security situation in the country.

Look at the abysmal human development index ratings of our country. Millions do not have access to basic human rights! How much I long for a strong consensus leadership emerging at the center, and all focused on nation's growth.

I digress, let me conclude here....till next time I keep dreaming of an able and visionary leadership at the top

Side note - Kumble retired yesterday, I think it was well timed. Thats going to put focus on Laxman, Sachin and Dravid now