The recent lull in the stock market has perplexed many economic experts, it has come during a time when there is a reduction in wholesale and retail inflation, decrease in unemployment rate and unchanged repo rate. More importantly this dip is not in keeping with the robust performance of the Indian economy. While India has been one of the fastest growing economies of the world, investors as seen by recent events, are still sceptical about the Indian market. This uncertainty is usually reserved for countries affected by political instability and unrest which is not a situation India is currently faced with and this this lack of investor confidence needs to be seriously looked into.
It is likely that two recent developments may have forced investors away from the market. Investors are not pleased with the last quarter results of various IT companies such as TCS and INFOSYS. Although both companies have made impressive net profits during the last quarter of the previous financial year, it has not attracted adequate investor interest. India’s IT sector has been doing well in recent years and has set the bar high. Every time the bar remains untouched, it will dent the confidence of prospective investors. Perhaps this is the reason behind the lull, as shares of all top IT companies have fallen considerably in the last couple of days. This is also emblematic of the crisis in the global IT sector.
[bsa_pro_ad_space id=1]Secondly, uncertain climate conditions also need to be taken into account. The United Nations (UN) has already ominously predicted that India will lose three to four per cent of its GDP due to global warming. True to the prediction, India’s Rabi (winter) Crop yield has fallen considerably due to excessive heat and unseasonal rains. As another harvesting season is fast approaching, fear of reduced earning from the agriculture sector is gaining ground. If the El Nino phenomenon affects Indian agriculture as many fear, shortage of food grains and other essential agricultural items will cause high inflation once again. In such a situation the Reserve Bank of India may have to raise interest rates to control inflation, which will further discourage investors. Another significant development that may have deterred investors is the fact that after a long gap, interest rates in small savings schemes have been hiked. Many investors, especially small players may have preferred to invest in those schemes as they were attracted by secure returns.
While the factors responsible for this lull seem temporary, they need to be dealt with carefully to avoid a substantial economic setback. Investment is often determined by the perception of an economy and it is, therefore, essential that steps be taken to boost investor confidence. The importance of investments can be seen in the recent growth in the transport sector which has been driven by enhanced investments. More investment in such important sectors will further make the country a favoured destination for investors and will certainly make the Indian economy less vulnerable to negative speculation.