WHEN stock brokers and traders did token ‘muhurat’ trades during a special one-hour session last Tuesday evening — which saw the start of Samvat year 2065 — most prayed fervently that the Hindu New Year would prove to be much better than 2064, the year just gone by, and one of the worst for stock market players in living memory.

The Sensex, the benchmark index on the Bombay Stock Exchange, had never been mauled so badly, as it had over the previous few months. The index had tanked by over 55 per cent since last Diwali, and investor wealth had eroded from Rs62.45 trillion to just Rs26.51 trillion.

This was also the first Diwali in six years when the Sensex had seen negative growth. The Sensex has been climbing steadily since Diwali of 2002 (November). It had lost about four per cent in the previous year, but began a steady climb from the level of 2,950 on Diwali day in 2002.

In October 2003, the Sensex jumped by 61 per cent to cross the 4,750-mark, while investor wealth also grew handsomely from Rs5.39 trillion to Rs9.51 trillion. The Sensex plunged in the middle of 2004, after the United Progressive Alliance (UPA) came to power and some Left leaders — who were then providing outside support to the government — made irresponsible statements about the capital markets.

However by Diwali of 2004, the Sensex had gained by 25 per cent (over the previous Diwali’s level) and nearly touched the 6,000-mark. Investor wealth also soared to Rs14.5 trillion.

Over the last four years the Sensex saw a growth of 33 per cent (November 2005), 61 per cent (October 2006) and 50 per cent (November 2007), before tumbling by 55 per cent over the past 12 months. Last Diwali, the index had topped the 19,000-mark and by early January it had scaled the 21,000-mark, the highest that it has climbed.

The financial crisis in the US, caused by the sub-prime mortgage fiasco, saw a meltdown in global financial and stock markets. Initially, traders and investors here believed that India would be insulated from the turmoil in the West and that the stock markets — while not climbing as sharply as in the past — would maintain the high levels.

However, the collapse of Lehman Brothers, the virtual nationalisation of American majors including Fannie Mae, Freddie Mac and AIG, and the trillion-dollar bail-out package by the US Congress shattered the confidence of foreign institutional investors (FIIs), who began dumping shares in the Indian stock markets.

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SAMVAT 2064 saw the Sensex plunge by over 55 per cent, from a level of a little over 19,000 to just around 8,500. FII investments into the stock markets saw the Sensex shatter several barriers over the past five years; naturally, with foreign investors panicking and dumping scrips — they have sold off over Rs500 billion worth of shares during Samvat 2064 — the Sensex and other key indices have also tumbled.

October has also been one of the worst months for the Sensex, when at one stage it shed nearly a third of its value. Though the stock markets recovered a bit on New Year’s Day and later during the week, most investors continue to be nervous, worried that the index could seek lower levels of around 5,000.

One of the main worries for stock market players is the looming election season. About five crucial north Indian states — including Delhi, Madhya Pradesh, Chhatisgarh, Rajasthan and Jammu & Kashmir — go to the polls over the next few weeks. The results of these ‘mini general elections’ would give an indication as to whether the UPA government will return to power after general elections due to be held over the next six months, or will it see a return of the BJP-led National Democratic Alliance.

Or will India be in for a spell of another round of instability, with none of the two major national parties — the Congress and the BJP — able to cobble together a coalition government? Market players are not worried about either a Congress-led or BJP-led government — what worries most of them is political uncertainty and the rise of third or fourth fronts, formed by unreliable and small parties backing unworthy candidates.

India has in the past seen such unsteady coalition governments that fell much before their terms ended. However, what marked their regime was the mismanagement of the economy and failure to push ahead with reforms.

Of course, with the Manmohan Singh government now being reduced to a virtual lame-duck administration, market players do not expect any major reform measures over the next six months. The absence of reforms in the financial services and other sectors — further opening up the insurance sector, slashing the government’s stake in public sector banks to below 50 per cent, allowing 100 per cent foreign direct investments (FDI) in sectors like retail, and formulation of an exit policy — have discouraged foreign investments..

With the American and European governments now resorting to nationalisation of banks and other financial institutions — albeit as a temporary measure to overcome the current crisis — the Indian government would be reluctant to initiate any further reforms in the sector.

Likewise, all talk of allowing full convertibility of the rupee even on the capital account has been shelved for the time being.

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MANY FIIs have been panicking and selling off shares because of the sharp fall in the value of the Indian rupee, vis a vis the dollar. In fact, the FII sell-out has precipitated the fall of the rupee, leading to further nervousness on the stock markets.

In 2007, FIIs injected nearly $18 billion into the Indian stock markets, sending the Sensex soaring by 50 per cent. The rupee too gained on the back of the FII inflows, notching up over 12 per cent against the dollar.

But with FIIs backing out of the stock markets — they have so far sold a net of over $12.5 billion in 2008 — the Sensex has tumbled by over 55 per cent and the rupee too has plummeted by over 20 per cent. The Indian rupee touched a record low of 50.29 against the US dollar earlier last week, before recovering a little. The Reserve Bank of India (RBI), the country’s central bank, has been desperately trying to defend the rupee. Fortunately, it had built up an impressive $315 billion in foreign exchange reserves, which has now dipped to around $275 billion.

However, there are fears that with about $50 billion of short-term external debt coming up for repayment over the next six months, India’s reserves and the rupee might take a further beating. Normally, short-term debt, borrowed abroad by Indian corporates, is rolled over.

But with the global financial crisis, much of it will have to be returned, resulting in tight liquidity conditions, adding to pressure on the rupee. Analysts expect the rupee to continue its sharp slide over the coming months.

This would further discourage FIIs from reinvesting in the Indian stock markets, at least for the next six to eight months. Analysts expect both the rupee and the Sensex to continue languishing at low levels for several more months. The Indian government and the RBI are also toying with the idea of allowing Indian banks with overseas operations to access funds from the foreign exchange reserves to help them tide over the liquidity crisis.

The RBI might issue bonds to the international branches of Indian banks, dipping into its reserves. A government committee has recommended that the central bank allow access to funds for many Indian banks.