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In my last article I wrote about the reason behind booming stock market in India. When I wrote that article ( only a few days ago actually) the Indian stock market was booming with the huge inflow of money from FIIs. However, suddenly it crashed and lost more than 2000 points in the next few days. In the festive season on Navratra, the pall of gloom engulfedthe market and the mood of investors turned from jubilant a sober.

What actually happened ?

Nothing actually. The economy is as sound as it was in the boom time. The companies are as profitable as they were a few days ago. Yet, the market crashed because the Government tried to instill some sort of regulation in it.

Let me explain it a bit : As I wrote in my last article that a major portion of the money being invested into the share market is coming from FIIs (Foreign Institutional Investors). The cause of concern for the Government was that in this major share of FIIs, more than half was in the form of hot money being invested into the market by anonymous investors who pump money into the market by utilizing the Participatory Note (PN) facility. All those foreign investors who are not registered with the SEBI (Stock Exchange Board of India), the regulatory body for stocks in India, can not directly deal in buying/selling of sticks. So they took a sort of permission from registered FIIs by buying Participatory Notes (PN) from them in exchange of dollars, which ultimately allows them trade in the market.

Though, this concept of allowing anonymous investors in the market broaden the reach of the market, it also ensure free entry of dollars into Indian economy as well as increase the percentage of hot money in the market. The hot money is that kind of money which is invested only for a short time to make some quick buck. It is not invested with a long term mindset. Since the continuous inflow of dollar into Indian economy is making the Indian currency (Rupee) stronger and thus making the export costlier, the Government was looking for someway to curb this inflow of dollars. Making the availability of Participatory Notes some difficult for foreign investors was one step Government thought would help control the inflow of dollars. So a few days ago the SEBI contemplated on a draft policy to make the issuing of PN difficult for FIIs. This was the step which gave a jolt to the buying spree of FIIs. As peope found that it would be difficult to trade in the market in future owing to non-availability of PN, they started exiting form the market by selling their stock.

Result- the market fell more than a 1000 point in a few hours and had to shut down for some time. Ultimately the Government had to rush in to alleviate the growing concern of Investors by stating that it would not control the issuing of PN to investors. This news will from the Business standard give you some detail of this exercise done by the Government.

As of now the market is still fluctuating and is yet to be stabilized. However, I think that in all probability, it will continue it’s upward swing despite such momentary crash. The main reason of my belief is that the Indian economy as a whole is performing very well Same is the case with most Indian companies listed in the market.

With the above note, here are some of my observations on what can happen if the stock market boom continues for lone in India:

First some positive one

First of all if this boom continues for long, soon the richest person in the world will be an Indian. On the last count (as per a leading newspaper report) Mukesh Ambani, the chairman of Reliance group was earning Rs 40 Lakhs ($ 100000) per minute. Yes you read it write. $100000 per minute ! Though it has much to do with his huge and expanding empire of Reliance industries, it is also because of the appreciation in the price of the shares of Reliance industries.

Secondly most investors, who are in the market for quite sometime are going to become really rich. The word ‘crorepati (multimillionaire) can soon become a common thing in India all thanks to share market.

However, there is a word of caution here. As this boom is being driven by FIIs (Foreign Institutional Investors), we must not forget that these people are here only till they find a new market more profitable than India. Once they find a place which offer better return on their investment than India, they will immediately shift there. Though, there is only a remote possibility of that as of now, you never know what can happen in future. That’s why most expert are advising people to stick to their long-term investment plan and don’t make any move in haste.

Owing to stock market boom, there is another very interesting situation being faced by Reserve Bank of India(RBI) (the leading central bank which decides various economic policies here just like the Federal Reserve Bank of US.) The investment being made by FIIs in Indian share market has resulted in to a huge inflow of dollars into the economy. The RBI is facing difficultly in managing this continuous inflow of dollars as their huge supply and easy availability has resulted into dollar’s depreciation vis-à-vis Rupee. The Rupee is becoming stronger to dollar thus making imports cheaper and export costlier. Some of our major export oriented industries such as Softwares and textiles are feeling the heat every day. The profits margin of these industries have reduced as it mostly depend on current value of dollar. There is a pressure on Government to mange the appreciation of rupee to favour exporters. Ironically, this can only be done if Government put some break on the inflow of dollars by FIIs which will actually mean putting a break on stock market boom. (it actually happened some days ago as I described above) Government certainly don’t want to spoil the party that is going on in the stock market. However, the continued depreciation of dollar is also a cause of deep concern which needs to be addressed.

The last but not the least is the overvaluation of many stocks in the market. Some experts have opined that market is trading at 22 to 23 times of actual earning and no one can justify these valuations.

In nutshell if I am to summarize this boom of stock market, I must say that this boom is not going to last forever as it is dependent on some very volatile factors that may change in the times to come. As I explained in my earlier article, a increase in interest rate in US may reverse this flow of FIIs. Or we may see emergence of a new market with great potential on some other place on earth. All these things, if happen, can put a break on this boom.

Being an Indian myself, I don’t want that to happen. I wish this boom lasts for the next 1000 years. Amen !

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