Posted by: anurag7000 | March 17, 2008

High Volatilty in the South Asian Stock Markets

During the past few years Indian Capital Market has undergone metamorphic reforms. Every segment of Indian Capital Market viz primary and secondary markets, derivatives, institutional investment and market intermediation has experienced impact of these changes. Our market, today, is being recognized as one of the most transparent, efficient and clean markets. Several techniques /instruments are used by academicians, policy makers, practitioners and investors to test the extent of efficiency of the market.

But in the recent months, the  mammoth decline in the Indian indexes have affected the sentiments of the Indian investors. The failure of IPO’s of many good companies like, Reliance Power, has also detered the faith of the investors. The sudden fall of the scrip prices has weakened the Indian Economy not fully, but upto a certain extent. The major reason behind this outcome is the US Sub-prime effect. It has recorded its presence in almost all the major stock markets of the world, whether Nasdeq or Nikkei. The US sub-prime mortgage crises has lead to plunging property prices, a slowdown in the US economy, and billions in losses by banks. It stems from a fundamental change in the way mortgages are funded. Even the 75 basis point cut in the interest rates by Bernanke hasn’t acted as an ointment to the wound.

The major question that arises now is, ” Is South Asia at risk?”. Well the current subprime mortgage crises in the United States will not seriously impact South East Asia. The impact will be mild because of the structure of the region’s trade and financial flows, and partly because of the compensating factors.

There are three fectors that will do well for the South Asian countries:

  • lack of exposure to the US mortgage securities
  • availabilty of liquidity in the domestic markets
  • the possibility that lower capital inflows could help countries such as India with macroeconomic mangement. 

If a global credit crunch leads to a decline in capital inflows, it may still not be a bad thing for India. The share of South Asia’s trade with the United States has been declining and the US is no longer India’s leading supplier. Sri Lanka, which used to be rely on United Sates for its garment exports, has now directed them towards Europe and other regions.

A slowdown of the United States’ economic growth will moderate the increase in prices of oil and other commodity prices, which will have a favorable impact on South Asia. Since all South Asian countries are net importers of these commodities, such a slowdown will provide some relief in their balance-of-payments 

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