Sensex loses Diwali sheen

The BSE Sensex breached the psychological barrier of 21,000 on 5 November, during the Muhurat trading session of Diwali.  It was seen as an indication of a further rally in the already high market. 

Favourable domestic sentiments and huge Foreign Institutional Investment (FII) inflows drove the Sensex to a 33-month high early this month.  The FII inflows reached  $ 12 billion in November, led by the anticipation that the US Federal Reserve Bank may go for some monetary easing. This led to a surge in liquidity and rise in the market.

On 26 November, however, the Sensex closed at its 11-week low of 19,136. The Sensex lost 8.89 per cent and realty, public sector, small-mid cap and metal stocks corrected by 12-26 per cent, over the month. In the past two weeks FIIs turned net sellers, shedding Rs.4310 crores in 12 trading sessions.

Several factors led to this fall. The Bank of America-Merrill Lynch Survey of fund managers first indicated this upcoming correction for November. They saw an impending correction based on the fund managers’ cash positions which were at a seven- year low.

Though the US Fed’s second dose of liquidity pumping gave a positive push to the market, concerns over inflation in China didn’t allow investors to cash in on the positive trigger. China is expected to raise its interest rates to ease the inflation which is at a 25-year high. The debt crisis in Europe, led to an all-out selling in markets across the globe in all asset classes.

Moody’s investor service said it may downgrade Ireland’s ratings further because the bailout may increase the nation’s debt and make it credit-negative. There is also anticipation about the debt crisis spreading to other European countries like Spain and Portugal.

The domestic scenario changed considerably over the month. The fall in the Index of Industrial Production (IIP) numbers for September created a selling pressure. The IIP for September fell to a 15-month low of 4.4% against the market consensus of 6.4%. By the end of the month, things became worse as more skeletons tumbled out of the 2G scam and the CWG fiasco. The resignation of A.Raja, as telecom minister  and the discussions on penalizing the telecom companies that benefited out of his favours, sent the market southwards.

The harshest blow, however, was dealt by the loan-for-bribe scam, last week. The sell-off began as senior officials of top banks were taken into custody. Those arrested included officials from LIC, LIC Housing Finance Ltd, Central Bank of India, Bank of India and Punjab National Bank. A total of 21 companies are under the CBI’s scanner. Investors  panicked and winded up their positions. LIC is the biggest investor in the market and its name surfacing in a scam worth crores, came as a shock.

The Korean crisis aggravated the panic further, sending the market down by over 600 points, intraday, on the 24th of this month. On 26 November, the Sensex declined to its lowest close, since September 9, at 19,136. It shed a total of 2.3% during the week.

"The market is reacting to any newsflow or talk related to the current developments. But, the scope and extent is not yet known," said Nitin Rakesh, CEO of brokerage Motilal Oswal, speaking about the fall in the market, in an interview to the newspaper, Mint.

India’s long term growth rate is estimated at 8.5%. Industry experts see a 20% growth in company financial earnings this year . Irrespective of these factors, many analysts  predict a choppy market in the medium term.

The Indian stock market is a high beta market i.e. it is very sensitive to external and domestic factors. Therefore its movements are exaggerated, as compared to its peers. Any negative triggers, globally or within India, can result in a further correction.

Bihar Elections - A Potential Game-Changer

The assembly elections in Bihar will be a test for both  Nitish Kumar and Bihar. If Nitish wins, his stand on performance-driven politics will be vindictated. If he loses, it will affirm the popular perception that Bihar cannot rise above caste politics. 

Bihar has been used, globally, as an example of poor governance. Elections have always been fought on the lines of caste and community mobilisation. This time the battle for the 243 seats is between casteism and development.

During  the five year rule of Nitish Kumar, “development” has been the buzzword. He has been able to take Bihar forward from a  3.5% growth rate to 11% in five years. An unprecedented crackdown on anti-social elements has improved law and order in a state, that was notorious for its absence. Social intervention and infrastructure build-up, hitherto unknown, are now changing its face. Accomplishments that have won Nitish accolades across all sections of society and managed to put Bihar back on the map for India’s industrialists.

Nitish has very cunningly intertwined development with the ground realities to boost his support base. His alliance with the BJP has ensured him the backing of the upper castes. But he has always kept the Hindutva agenda of the BJP at a distance. He took exception to the famous Nitish –Modi handshake advertisement and ensured that Modi did not campaign in Bihar for the BJP. And he has reaped its benefits. Muslims, inspite of the Allahabad High Court verdict on Ayodhya, seem to favour Nitish.

He has carved out a new section from the existing Dalit community in the form of Mahadalits or Most Backward Classes, thereby creating a huge dent in his opposition’s support base. Mahadalits form 36% of the Dalits that have traditionally favoured the RJD-LJP combine.

Nitish, for the first time, gave Bihar’s women 50% reservation in the Panchayat Raj institutions. Winning the support of women means support across caste and class divisions. The turn-out of women in the 2010 elections has gone up by 10%, compared to the 2005 polls.

Interestingly, Nitish has also been able to make inroads into the Yadav community, the single most important opposition to his Government. The young Yadavs in Bihar now prefer development over caste affiliation.

Lalu Yadav, is, as always, riding on his caste card. So is Ram Vilas Paswan. The combine will be able to pull in the Yadavs and the Paswans. But even in constituencies that have been Lalu’s traditional strongholds, disillusionment with him is gaining ground.

The Congress seeks to repeat its stunt in UP, by putting Rahul in the forefront of its poll campaign and going it alone in Bihar. That it is aware of its fate is evident in its handpicking  Mehboob Ali Qaiser as the President of the Bihar Congress. Fielding a weakling like him against the likes of Lalu and Nitish looks like  a disaster in itself. The Congress will focus more on dividing the votes between RJD-LJP and JD(U)-BJP. It is definitely not in this fight to win.

All the six phases of the elections are over, with record turnout and minimal violence. If the popular sentiment and exit polls are anything to go by, Nitish seems all set to come back. The question is, how strongly. Caught between progress and patronage, the electoral dynamics of Bihar are complex. A verdict in favour of Nitish will change the ground rules of electoral battles in Bihar and India at large, forever.  Its immediate implications will be seen in the UP Assembly elections, next year.