On Monday, it seemed there was no stopping the Sensex. India’s benchmark Index broke through the 19,000 level, just four days after smashing through the 18,000 barrier, to rack up a total gain of 5,000 points over only 38 sessions. On Tuesday, the Sensex advanced again to a record high of 19,174.
It’s the stuff of investor’s dreams.
And the kind of thing that keeps a regulator, shaken and sweating, awake deep into the night.
On Wednesday, the government decided to take action against the runaway index and target the people – namely foreign investors – who’d driven it to its frothy highs. Last year, they poured $10.7 billion into the stock market. This month alone, the figure was $4.5 billion. So the Indian government announced their plan to curb the flood of foreign money entering the market.
Shares nosedived, falling 9% in early trading, and only arrested when trading was halted in Bombay. An announcement later that day from the country’s Finance Minister, Palaniappan Chidambaram, helped pare losses, after he said that the plans were not designed to discourage foreign investors. Rather, they were there to moderate capital inflows that had fuelled a “very steep rise” in stocks.
The Indian government’s concern is understandable. The surge in capital inflows has led to a strong rise in the rupee against the dollar, and forced the Indian Central Bank to buy a record £39.9 billion in the first eight months of 2007 to dampen the currency’s rise.
Only yesterday, billionaire Indian businessman Sunil Mittal warned of the danger posted to the country’s export sector by an appreciating rupee. In his capacity as president of the Confederation of Indian Industry, he told The Daily Telegraph that the rupee’s appreciation had ‘led to the loss of comparative advantage for Indian exporters and put pressure on margins through cheaper imports’. Already, big name Indian companies such as Infosys had been forced to hedge significant amounts of money in dollars.
So the correction is a welcome development, especially coming on the back of a Lehman brothers report predicting that the Indian economy is set for “takeoff.” Having expanded by 8.6% on average over the past four years, the economy could achieve 10% annual growth over the next decade, said the bank. Citing figures that showed per capita income had doubled to $800 since 2000 and that the middle class has swelled to 13 million households, it said “We judge that India could grow even faster’ than it is at present.
A pleasing thought for those foreign investors who held their nerve and clung to their Sensex-listed shares yesterday, even as everyone around sold theirs.