The Phoenix on Dalal Street

The Sensex has plummeted during the course of this week. Last year, the benchmark stock index jumped 47%, with widespread enthusiasm over the prospects of the Indian economy. Was this only overconfidence that led to a stock market bubble that is now bursting or will the Sensex rise like a phoenix?

The rise and fall of the Sensex

The Sensex hit a peak of 21,206.77 points on January 10, 2008. The wider National Stock Exchange index, Nifty, reached a record high of 6,357.10 on January 8. Over this week, however, the bourses have witnessed a bloodbath. On Monday (January 21), the Sensex lost 1,408 points. The 30-share barometer plunged about 10% at the open on Tuesday (down 2,029.05 points to 15,576.30 minutes after the start of trading) and trading had to be halted for about an hour. This marked the fourth time in the bourse’s history that trading has been suspended. After open, trading did not stabilize. By the close, the benchmark Sensex index had lost 875 points, or close to 5%, to reach 16,729.94. The 50-share S&P Nifty was down 309 points, or close to 6%, at 4,899.30. On Thursday, the Sensex fell 372.33 points, or 2.12%, to 17221.74.

Bulls rule the roost

Over the past couple of years, the Indian stock market has rallied. The bullishness stemmed from the fact that the Indian economy exhibited high growth rates and forecasts remained optimistic. Rapid industrialization and a huge market supported the optimism. With massive expansion in the middle class and salary-scales growing manifold, the stock market was thronged by million, willing to try their luck.

The bear raises its ugly head

The US had a tough year in 2007, trying desperately to cope with a decelerating housing market, a credit crisis and a general economic slowdown. Fears of recession in the US impacted equity markets globally. The US is a huge consumer and a slowdown in spending here hurts the global economy. For India too, the US is a key market for exports as well as outsourcing contracts.

Moreover, with a recession looming, foreign institutional investors (FII) began pulling out funds from the more risky emerging markets.

The stock market was also impacted by volatility in the commodities markets as well as profit taking.

Thank God its Friday

Triggered by buying by foreign funds, the Sensex surged on Friday, closing up 1,005.57 points at 18,227.31. Nifty jumped 304.30 points to 5337.75. In fact, most Asian bourses rallied on Friday and Wall Street ended up on Thursday. Sentiments improved on news of the US government’s plan to boost economic growth. The US Federal Reserve is widely expected to cut interest rates when it meets later this month.

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