Fear of war came at the worst possible time for the Indian stock market. September first week was a sudden awakening for the Indian economy and stock market, the Prime Minister of the country came out with very disturbing statements on the performance of the economy. However he said that corrective measures in the form of speedy reforms and higher government spending will be initiated. The next week we had the attack on America which shattered whatever little hope was there for the stock market.
The new economy led by software sector who derive substantial part of their revenues from US were the major losers. Even though some of the fund managers found the present price level attractive they do not want to take any chance in the present war prone conditions. The Fridays steep fall is mainly due to fear, no one wanted to take a bet for the weekend when anything could happen on the war front.
The Indian government had take positive measures earlier this week to make the Indian stock market attractive for foreign investors. Government allowed banks to finance brokers for margin trading in shares. Margin trading is borrowing funds for stock buying and using the bought shares as collateral. This system effectively increase the liquidity in the stock market. Banks are allowed to finance actively traded stocks which form part of the Bombay stock exchange Sensitivity index and the nifty index for national stock exchange. In practice the bank is allowed to finance 60 percent of the value of the trade and the broke is expected to fund the balance 40 percent value of the trade.
The government also allowed Foreign Financial Institutions to increase the investments in Indian companies beyond the earlier limit of 24 percent of the paidup capital of the company. At present investment up to 24 per cent is automatic and it can be raised to 49 percent subject to approval of company board and share holders. Foreign financial institutions can now buy up to 100 per cent of the equity subject to sector specific ceilings. Unfortunately none of these could overcome the fear factor which dominates the stock market players.
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