The Indian economy is in the throes of a recession. But its fundamentals are still strong. But the Indian stock market is not going with a steady rise and it is more or less fluctuating towards a downward trend. The forex exchange situation of the country has slid a wee bit from $30 billion to $27 billion, but that still is a strong position. Inflation is low. Interest rates are pretty low, but picking up nevertheless. Short term interest rates have hardened, which is a sign of improving economic activity. However, capital expenditure and project financing have taken a beating, chiefly because excess capacities were built up during the heady days preceding the current slowdown. Since demand has not lived up to expectation, these capacities have remained idle.
It was a paradox to observe select non-banking finance companies (NBFC) stock rising on the bourses when Reserve Bank of India unleashed tighter norms regulating these companies accepting public deposits. The outcome of the regulations would be to make the scenario more competitive and reduce the overall spreads thereby impairing profitability. On the other hand, RBI has failed to stipulate what action would be taken against those who default in repayment of fixed deposits, fail to meet the required criteria or exceed the prescribed limits. Surprisingly, fixed deposits accepted by an manufacturing companies have not been touched by the fresh set of regulations. As a result, the objective with which RBI initiated new regulations is not clear. It seems to be just to reduce the number of NBFCs in the country. Rather the objective should have been to discipline the companies accepting the fixed deposits and initiate strict punitive measures against those defaulting in repayments and those exceeding the prescribed limits. The only good step is that companies getting owe than A rating would not be allowed to access deposits from the market.
The year 1997 could probably be looked at as one of the worst years for the primary market in the recent times. During this year, only 128 number of offers could tap the market through corporates mobilized Rs. 5032 crores against 1445 issues in the year’95 which mobilized Rs. 14576 crores and 1183 issues raised Rs. 12400 crores in the year ’96. it seems to be the repercussion of plethora of issues that had tapped the market in last three years and thereafter left their investors in the lurch. All types of companies flooded the market with many issues during the last three years. Investors invested their hard earned money in hope of high returns, but contrary to their expectations there were no buyers for their investments. This resulted in no quotation of these companies today leaving aside any returns on investments. Belatedly, regulatory body awoke from its slumber and tightened the entry barriers, specifically related with finance business. Now as per the SEBI guidelines a manufacturing company needs to have three years dividend paying track record to tap the market. A new company can come to market only if it has five percent participation of FIs / Banks in their projects.
From the face of the Indian stock – market, the small investor has been virtually wiped off. It is evident from a recent survey by the Federation of Indian Chamber of Commerce that the household’s sector investments in shares and debentures have dipped since 93 – 94 and now account for just 0.5% of the gross domestic product. Much of the apathy of the small investor can be attributed to the poor state of the country’s primary and secondary markets. While some of the basic reasons behind the decline of the primary market are macro-economic, such as the credit squeeze in the economy. In the secondary market also, excessive speculation, sharp volatility, and systemic problems played havoc with the small investors’ confidence in the capital markets.
As a direct sequel to the present debacle, record competitiveness is a persistent argument for a weaker rupee. And how, as an extreme measure, the Reserve Bank of India has hardened its stand to prevent a further downfall in the rupee. From this standpoint, it is time to look at the fundamental issues which intrinsically guide the movement of a currency, like interest rates which can affect stock markets to a greater extent. Clearly, some banks are yet to learn their lessons. In the circumstances, it would be a gross mistake to assume that the round of hikes in Prime Lending Rates is due to any lack of liquidity in the system at large. We must distinguish between what is essentially the consequence of an asset – liability mismatch in individual banks and a systemic problem for banking sector as a whole.
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