On 21st January, 2008, the Sensex crashed by 1408 points – probably the largest fall in history. This occurred despite positive Q3 results of leading domestic companies and the optimism that is prevalent with regard to the Indian growth story. The US sub-prime crisis, the weakening of the US economy and taxation of the FII trade profit can be cited as a few reasons.
The year 2007 was a year of excitement as the financial markets generated supernormal profits. There was something surreal about the way investors churned hundreds of crores of profits every year. The disconnect was just too wide and had to be bridged. At best, this may make one feel a bit bad but one will feel much better on a rainy day when 70% of your portfolio won’t get knocked out in a week. Financial markets are not only about generating supernormal profits but also about preserving capital.
The crash has cooled off the unabated bull run from 5000pts to 21000pts. Probably the traders were waiting for this short-lived dip to get towards realistic figures. Soon after, the sensex gained 1139 pts on 26th January when the Fed announced the rate cut. FII’s had withdrawn over $2.5 billion in a week but then reinvested following the rate cut. This has made us realize how volatile the markets are.A stable bullish market can be maintained if the economy guards itself against an untoward trend in the global situation due to a sub-prime any possibility and increasing oil and commodity prices.
The domestic political situation which might lead to an early election may cause certain nervousness in the market. The intact growth story, 8.5%-9% GDP growth rate, favorable interest rate regime and expectations from the budget offering new impulses for growth, reflect the feel-good factors. The year 2008 may herald the return of a steadier 20% earning growth, robust cash flow, a high return ratio and quarterly growth delivery validating the necessity of the crash and stabilizing the crazy bullish market.
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