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Editorial: Wrong target

Business Standard  |  New Delhi 

So short selling by the foreign investors isn’t the reason for the precipitous fall in the stock market, after all! According to the numbers put out by the government, of the total 100 billion shares in 224 companies, only 192 million shares were lent by them abroad till October 8. That is a piffling 0.2 per cent. What is more, in nine out of 10 cases where the price falls were the sharpest, at most only one or two in 10,000 shares were believed to have been lent offshore. In one instance, it was slightly more than 1 per cent and the highest number of shares lent by foreign funds was in the case of ICICI Bank, at 12.7 million shares. The data proves conclusively that short selling was not the reason for stocks and indices hitting new lows in recent weeks—at least, not during this period.

It would have been interesting though to have crunched the data for a slightly longer period because a lot of the damage happened after October 8, 2008. It was on October 10, for instance, that the ICICI Bank stock crashed 27 per cent intra-day, closing 20 per cent below the previous day’s close. And the Sensex gave up over 23 per cent in the 12 trading sessions between October 8 and 24, the day on which it plunged by over 1,000 points to close at 8,701, the lowest point for 2008. But since, a few days before that, the stock market regulator had asked foreign investors to reverse all lending and borrowing positions, they would presumably have started the process. That is why it is unlikely that anything dramatically different would be uncovered even if the data were looked at for a longer time span. But none of this argues against the action taken by the market regulator to prevent overseas investors from getting an advantage over domestic players when it comes to stock lending, by using participatory notes.

It is clear now that foreign funds managers needed to salvage what little was left of their investments in the country, especially given the speed at which the rupee was losing value against the dollar. In a cash-strapped world, it makes sense to cut your losses and run and that’s what they have been doing. Between October 9 and 24, the foreign institutional investors dumped $2.3 billion worth of stocks, which is about a fifth of their total sales this year; between January and now, they have liquidated $12.6 billion worth of Indian equities. Domestic institutions, especially mutual funds, have been helpless against this avalanche and so it is not at all surprising that the market has been brought to its knees.

Volumes in the cash section are much lower than they were at the start of the year, having come off by about 35 per cent, which makes the market less liquid and exaggerates price movements on the way up as well as down. Volumes in the futures segment too are down by about 25 per cent. For sure, there is a good deal of short selling in the market just now, and both FIIs and local operators are punting in the futures segment. But since there are fewer bulls than bears, the latter have had a field day. Still, as has been said before, short selling is healthy for the market; it makes for more efficient price discovery and boosts volumes, both of which are beneficial for investors. The regulators need to worry less about its ill effects and focus more on introducing a better stock lending and borrowing mechanism for domestic players.