Slippery slope

The intensifying selling pressure in Indian equity market calls for the market regulator, the Securities and Exchange Board of India, to take preventive steps to protect the credibility of stock markets. Equity markets across the globe have been buffeted by a series of events since the beginning of this calendar — the trade war initiated by Donald Trump, the Federal Reserve’s monetary tightening and crude oil prices moving sharply higher. It’s probably for this reason that benchmark indices of many Asian emerging markets such as China, the Philippines, South Korea are down over 15 per cent since the beginning of this year. The loss in the Indian benchmark indices, the Sensex and the Nifty, is relatively milder in this period, at less than 2 per cent.

While the Indian bellwether indices were resilient to global headwinds in the earlier part of the year, supported by domestic mutual funds, they have been badly hit since August. The benchmarks are down almost 14 per cent from the peak, led by the sharp depreciation in the Indian currency and a widening trade deficit. Of concern is the fact that global conditions for equities continue to be challenging, with higher bond yields, heightened geo-political tension due to the killing of a Saudi journalist and concerns over growth. Given the rising risk aversion among investors, foreign portfolio investors have been pulling money out of emerging markets including India; net selling by FPIs in Indian equity stands at $4.6 billion so far this year. While tighter global liquidity can affect FPI flows in the coming quarters, availability of funds has become scarcer domestically too following the liquidity crunch facing NBFCs after the IL&FS crisis; with implications for leveraged trading on stock exchanges. Continued uptrend in Indian equity over the last two years have also made valuation in mid- and small-cap segments too pricey; some of the froth continues despite the recent stock price declines.

Corrections are par for the course in stock markets and the stock market regulator should not hinder market-led price discovery. That said, if there are indications that speculative positions are growing to uncomfortable levels, the regulator can consider increasing trading margins, in order to reduce such positions. A survey released by SEBI showed that retail investors accounted for around 30 per cent of trading turnover in the derivative segment. These investors can get hurt if there is too much volatility in the market. Also, novice investors who have just begun investing in stocks or equity mutual funds over the last couple of years might get flustered by such steep declines. SEBI and the exchanges need to run investor awareness programmes to educate investors about the manner in which such phases should be handled. The regulator should also up its surveillance, to spot and check stock price manipulations so that speculators do not run amok and exacerbate the decline.