'Hype Has Resulted In The Overvaluation Of Market'

Business Standard: What do you think is the main reason for the slump in the capital market? What measures can be taken to improve the situation?

Devina Mehra: I believe the primary reason for the slump in the capital market is the poor fundamentals of the economy. Though the process of liberalisation introduced by the previous government has unshackled the economy from the grip of red-tapism, it has given way to too much expectation. The hype was built up and has led to an overvaluation of the market.

The market has been witnessing unexpected movements, nobody is in a position to either predict or reason out the cause of such erratic movements. Whatever activity we have witnessed - the boom and the following slump - was primarily a result of speculative activity. Tracing back to the history of reforms, we find that there have been instances of similar trend in other markets also. We witnessed a reasonable growth in the initial days of reforms, but now with interest rates looking up, and a sluggish industrial growth, we may witness a slump in the capital market also.

 

To further compound matters, there is a lack of demand for funds from quality borrowers. The demand for funds has gone down though the financial institutions are flush with funds. All this has left the market in a highly overvalued state and it has yet to realise its actual or intrinsic value. There also seems to be some confusion over the data available, with each of the statistical institutions providing contradictory figures. We believe the industrial growth figure of 10 per cent is a bit unrealistic. Also the import growth has been sluggish and this also has a negative affect on the prospects of the capital market.

There is another reason which keeps retail investors away from the market, and that is the availability of quality debt instruments. There are a lot of debt instruments which provide investors with risk free and tax-free rates. This certainly is an attractive proposition for investors.

BS: The market is keeping its hopes pinned on the Budget. What are the various options which the government has and what should be the measures which it should introduce so as to prop up the capital market?

DM: In a sense the government has little options with the threat of an increasing oil pool deficit looming large. This is a real cause for concern for everybody and if the price of petroleum products is increased then this is sure to affect various others sectors of the economy. There has been a persistent demand from various quarters for doing away with the minimum alternative tax. I believe there is a logic in introducing MAT. However, as it stands today, the introduction of MAT fails to meet its objective. The government should slash the capital gains tax, which could really bring in a lot of life to the capital market.

BS: What would be an appropriate time for the retail investor to come back to the capital market?

DM: I would say that the investors should restrict themselves from entering the market till the next two years. The cement industry is one particular segment which is expected to do well. This apart, the petroleum and pharmaceutical industry are also expected to do well.