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Head: Equities in a Tailspin

With the market in the middle of a bear phase, the current events do not impair the medium and long-term outlook for equities

The attack on America has its effect on the Indian equities much before it shows on Wall Street. The BSE Sensex tanked -- 353 points (11.04%) during the week, to its December 1998 level of 2830. Much of the selling pressure came from FIIs, who were wary of redemptions back home when markets open in the US. The FIIs had net sales position of Rs 183 crore in the current month, as compared to the net purchase position of Rs 12785 crore till last month.

Indian software and oil stocks were on a free fall. The huge institutional offloading of IT stocks having a major presence in US markets led to a 15 percent dip in the BSE IT Index. At the fag end of the week, Hughes Software lowered its current year earnings estimates to 20 percent from 60 percent projections in April. Hughes Electronics Corp. US owns 56 per cent of the company. And on fear of squeeze on margins with rising world oil prices, the Indian oil stocks - Reliance Petroleum, BPCL, HPCL witnessed huge selling. To guard sharp fall, SEBI clamped stiffer circuit filters -- lowered from 20% to 10% in 53 stocks. That implied frozen trading in the scrip on a 10% price change.

Other Asian markets also fell - Nikkie losing 682 points to touch its 17-year low and the Hang Seng plunged to Feb 1999 levels.

Economic implications for India
The attack is significant distraction when the government was just about getting serious on combating economic slowdown. Economists have cautioned that India's fiscal deficit can shoot to 6 percent, if the government spends over the budgeted target. With likely higher defence spending in a war like situation or rise in oil pool deficit, rise in import bills with rupee touching 47.81 to a dollar, the economic outlook looks grim. The Prime Minister has already warned the country to be ready for tough measures and hinted at a possible rise in domestic oil prices.

The market in the middle of a bear phase, the current events do not impair the medium and long-term outlook for equities. Great uncertainty is driving fear leading to the sharp fall. However, most fund managers have not changed their projections about the market and foresee stability ahead. In the past on such special situations, markets recovered fast soon after. This was during Gulf war in January 1991 and the Kargil Crisis in May 1999.

Securities firms and corporations in US have decided to buy shares in concert to prevent a free fall in prices. SEC has also allowed easy buyback of shares by companies. This might prevent a market crash, as discounted by the Indian markets. Over the long term, the internal economic factors will guide the FII infows.