06 October 2015 09:32:22 IST

Easy money won’t drive the stock market now

Sound economic management, ease of doing business and investor protection are critical

The US Fed Chairman chose to play football last month — kicking the can down the road rather than play hardball by raising US interest rates.

Her fear was whether global markets would be adversely affected if she raised rates. But markets did not quite cheer the continuation of easy money by rallying further. Instead, they all mostly declined last week — 42 points down for the Dow, 37 for FTSE and 158 for Nikkei.

Going strong The BSE Sensex, in contrast, rose 357 points last week, to end at 26,220, after RBI Governor Raghuram Rajan made a larger-than-expected 50-basis-point cut in interest rates.

The Sensex rallied, despite the month of September witnessing the highest outflow of foreign institutional investor money in the past five years at $2.6 billion; and despite the index of industrial production growing in September at the slowest rate for the past seven months. What does it suggest? One, domestic investors are investing more in financial assets, and less in physical assets, such as gold (which the government should, and is, encouraging). Much of this is routed through mutual funds, giving domestic funds the arsenal to better withstand a withdrawal by the FIIs. Two, it also suggests that investors continue to hope for more economic reforms. These, together with more capex plans — Coal India has announced capex plans for ₹60,000 crore, IOC of ₹150,000 crore, BPCL of ₹45,000 crore and Nalco of ₹65,000 crore — would kick-start the capex cycle.

Required reforms There is optimism for more economic reforms. For example, last week the Finance Minister announced that the government intends to reduce its stake in PSU banks to 52 per cent.

In fact, except for lack of political courage, there is no other reason why the government cannot reduce its holding even further. The safety of India’s financial system would be ensured by retaining a majority stake in SBI plus one or two of the larger PSU banks; the others can be let go. The government would fetch far more by privatising (selling a controlling interest) than disinvestment (selling piecemeal).

Besides, private banks have better productivity as indicated by ratios of business/employee or /branch and profit/employee or /branch. So, privatising banks without risking the system would enhance the efficiency of the banking system. It will also improve capital allocation — PSU banks have an unsupportable NPA problem as a result of their directed lending to crony capitalists.

The financial sector also needs reform. Last week, after years, the SEBI attached the properties of scam-tainted Saradha, worth ₹774 crore. It slapped a penalty of ₹7,269 crore on PACL, and asked it to refund a whopping ₹49,100 crore to investors, affected by a fraudulent collective investment scheme which SEBI had tried to stop right in 1998.

PACL had, over 16 years, used various legal means to raise money despite the SEBI ban, and use it. Sahara, too, had been banned from raising money without an approved prospectus, but nonetheless managed to do so by manipulating the judicial system. FTIL is also similarly delaying its day of reckoning by dilatory tactics employed by its battery of expensive lawyers. Victims of the fraud do not have the money to engage expensive lawyers.

Last week, the Bombay High Court withheld dividend payment to promoters of FTIL until the NSEL issue is settled — a step that ought to have been taken two years ago.

So, easy monetary policy is not working as an aphrodisiac to raise stock markets. Rather, it is sensible economic management of a country, the ease of doing business and the protection afforded to investors, direct as well as indirect, that will drive money to those countries that display it.

It is on these things that the government should concentrate. If it does its job well, the market will do its job well.