Volatile stock markets

Portfolio adjustment made by the foreign institutional investors result in destabilising tendencies in the country's system. The best policy option is to reduce the inflow of FII investment and focus on the creation of real wealth. THE expected but abrupt end to the bull run in India's stock markets, signalled by a 316-point intra-day decline in the Sensex on January 5, once more focussed attention on the volatility that has come to characterise India's stock markets. This volatility has been visible in the medium and long term as well. From a low of 2924 on April 5, 2003, the Sensex had risen to 6194 on January 14, 2004, only to fall to 4505 on May 17, before rising to close at a peak of 6679 on January 3, 2005. These wild fluctuations have meant that for those who bought into the market at the right time and exited at the appropriate moment, the average return earned through capital gains were higher in 2003 than 2004, despite the extended bull run in the latter year.

Movements in the Sensex during these two years have clearly been driven by the behaviour of foreign institutional investors (FIIs), who were responsible for net equity purchases of as much as $6.6 and $8.5 billion respectively in 2003 and 2004. These figures compare with a peak level of net purchases of $3.1 billion as far back as 1996 and net investments by FIIs of just $753 million in 2002. In sum, the sudden FII interest in Indian markets in the last two years account for the two bouts of medium-term buoyancy that the Sensex recently displayed. At one level, this influence of the FIIs is puzzling. The cumulative stock of FII investment, totalling $30.3 billion at the end of 2004, amounted to just 8 per cent of the $383.6 billion total market capitalisation on the Bombay Stock Exchange. However, FII transactions were significant at the margin. Purchases by FIIs of $31.17 billion between April and December 2004 amounted to around 38.4 per cent of the cumulative turnover of $83.13 billion in the market during that period, whereas sales by FIIs amounted to 29.8 per cent of turnover. Not surprisingly, there has been a substantial increase in the share of foreign stockholding in leading Indian companies. According to one estimate, by end-2003, foreigners had cornered close to 30 per cent of the equity in India's top 50 companies - the Nifty 50. In contrast, foreigners collectively owned just 18 per cent in these companies at the end of 2001 and 22 per cent in December 2002. A recent analysis by Parthaprathim Pal estimated that at the end of June 2004, FIIs controlled on average 21.6 per cent of shares in Sensex companies. Further, if we consider only freefloating shares, or shares normally available for trading because they are not held by promoters, government or strategic shareholders, the average FII holding rises to more than 36 per cent. In a third of Sensex companies, FII holding of free-floating shares exceeded 40 per cent of the total. Given this presence of FIIs, their role in determining share price movements must be considerable. Indian stock markets are known to be narrow and shallow in the sense that there are few companies whose shares are actively traded. Thus, though there are more than 4,700

Can Indian markets escape global volatility?

Volatility is an inherent part of stock market investing and investors need to keep in mind that market gyrations tend to be more pronounced over the short term. Increased volatility over the near term could be due to a plethora of factors liquidity, earnings expectations, speculation, etc.

However, over the long term, equity markets tend to reflect the economic and corporate fundamentals, which continue to remain healthy for India relative to most emerging markets. In recent years, India has grown in prominence and has been one of the top destinations for capital flows amongst global investors. The flip side of these inflows is that unlike in the past, Indian markets are now more integrated with global trends and will be impacted by any contagion, at least over the near term. The background for the current global volatility lies in the fact that a majority of investors across the globe were hoping for a goldilocks' economic scenario and this was reflected in historically low volatility levels as measured by various indices such as VIX. History is replete with examples of such hubris leading to painful reality checks. As sub-prime mortgage problems in the US and fears of a sharp unwinding of yen carry-trade came to the fore, investor sentiment took a turn for the worse and global markets witnessed a synchronous sell off. While markets have bounced back after the correction, it is too early to rule out further volatility. One of the highlights of the recent correction has been that it took place across asset classes and currencies stocks across the world, commodities and credit markets. Treasuries benefited from the changing risk perceptions. The main reasons for this phenomenon have been excess liquidity (read Asia's saving surplus and petrodollars) looks for attractive investments and hedge funds looking for absolute returns (also leveraging to enhance returns). All these factors mean that there has been a rise in the correlation between various markets and asset classes, and risk averseness will result in an in-sync movement. The recent fall in the Indian markets has come about after a strong rally and in that sense, it was to be expected. Apart from the global factors, domestic developments such as sectorspecific measures in the Union budget also had an impact on investor sentiment. Also weighing on the markets could be tightening liquidity as the Reserve Bank of India looks to stem inflation through various monetary measures and the rising risk premium due to the rising yields in the debt markets. Therefore, the recent volatility in India is not solely due to global markets. There could be some short-term volatility due to earnings expectations over the past five years, earnings growth on an average has been around 30%, which would not be sustainable going ahead. However, one of India's key advantages is that it does not rely excessively on external demand as a source of growth.

Stock market Volatility, why Indian stock market be it NSE or BSE are volatile

Rate of inflation Inflation rate also affect more about the stock market. Due to this trading in the stock market i.e. selling and buying the shares of the company takes place. Inflation greatly affects the other financial institution also, due to this all the loans issue by the bank also increase their rate of interest which greatly affects people. Due to this volatility people doesnt count or pay much interest to the investment in the stock market, somewhat it can also be true that volatility is a sign of untrustworthy by people who doesnt know the working and the functioning of stock market and how it works because of this instead of investing in the stock market people used to save their money with less interest in a bank and so on. Since stock market is not only played by a single company, thousands of competitors come up with news which results in variation in stock market points. During the election the economy was very low due to internal disturbances and interferences and sensex was up again on the very minute when the parliamentary election was over. It is advisable to get good knowledge on NASDAQ, BSE, NSEetc. Stock market points also greatly varies from different points and become low when the country had a new development like manufacturing nuclear bomb because this has a deep impact on the country as well as with the foreign countries, by that time some countries stop trade with India as they want to punish for what they possess and even others countries stop supplying weapons to India. In this case the sensex is low because trading cannot be done and there is less cash revolve and circular or cash chain in the Indian stock market. But like the history Stock market never remains in the same points Even though the market might slashes within a short span of time comes out with the normal routine of ups and downs points since No company wants to remain the same ,every company wants to survive so in order to survive they have their own special team who will create new thinking even though they might be top in the market they still wants to control the market, they want to show themselves that they are unbeatable this in turn will leads to the changing of the sensex, and when big companies change their project also sensex in influence , because they normally done quite lots of things like the Tata company they have change the manufacturing place for their new products where they have spent quite lots of money So, as the stock market is formed by different company, each performance affects the stock market and makes stock market volatility.