With the stock market showing signs of recovery, the question uppermost in everyone's mind, is whether the recovery would be sustained. And is it time to be investing? Let us look at it from several angles. First to the causative factors for the continued market fall. Last week's continued decline in stock prices was in response to further erosion in rupee's value, the FII action and the possibility of the UF government's fall.

Anyone who has dippped deep enough into the dynamics of the Indian economy should not find it difficult to predict the most likely level where the rupee will settle down, say in a six months span. The forward premium of say 7 per cent set the outer limit. And beyond that period we know that the rupee on a long-term is expected to go down by around 5 per cent every year. In the short run however, when the rupee depreciated in the last fortnight by around 2 per cent, one could understand why FIIs would stay away. Waiting made sense.

Take the political situation next. The Gujral government may stay or may go. We do not know for sure, for politics is the art of making the improbable, possible. But even if we assummed that the UF Government will fall, is anyone really afraid of another coalition government. Not at least the stock investors.

The coalition politics of last year has put everyone through the learning experience of how and what kind of balance the politicians strike between economic rationalism and the reality of political populism. We know how the politician has lacked the courage to tackle fully the mounting burden of non-merit subsidies on the nation, as outlined in Chidambaram's paper. The rule of the game is to survive today and postpone the reckoning to another day and to another government. Remember the 1991 story? So a new coalition government does not pose any new threat or invite a new discounting for the stock market. For the bottomline for the politician has more or less been defined by now. In fact, the coming in of a new government would help clear the air and help market recovery.

It is only fresh elections that can really cause damage. The UF government has over the last one year worked to overcome the inertia and has set the ball rolling on the infrastructural front. Should elections interrupt political governance, much pending work in power, roads and telecommunications would grind to a halt. This would seriously impact on the manufacturing industry, especially the steel, cement and power related sectors. All these industries are desperately looking for oxygen will breath hard. Also the government has started an action plan for demand revival, which will then suffer. Apart from political developments, the latest figures of growth emanating from some industry associations are causing concern. As per figures provided by the Associations Council Confederation of Indian Industry (Ascon), 32 per cent of the sectors have shown negative growth, 38 per cent showed a low growth of below 10 per cent and only 30 per cent showed a growth rate of above 10 per cent for the first half of fiscal 1997-98 as compared to the previous comparable period. This highlights the need to tackle demand revival. Also incremental investments in capital goods is not taking place, despite sufficient growth in savings. Businessmen lack the confidence to be investing for obvious reasons. Unless these investments come about the economy cannot maintain its growth rate. So much needs to be done on a continuing basis for the stock market to stay healthy.

Now come to FII investments. Latest figures both globally and in India suggest that foreign mutual funds are puling out of south east Asia as well as India steadily. The picture here is complicated and we lack full information into the dynamics. But under such complex circumstances, you have the market price setting mechanism as the best answer. The market has all the players and knows what it is doing and why. Several scrips have started bouncing off the bottom in the last two days of the week gone by. Call it short covering or whatever, it is ultimately the market's measure.

Some FII fund managers have affirmed that Indian stocks should attract investment once the far east turmoil settles down.

So finally should you be investing now?. The answer would seem yes, but selectively; the way HLL, ITC, L&T and M&M have steadily advanced. Would the market go down further? There is no easy answer to this for we do not know what further tremors can set in other Asian markets. But what we certainly know is this. The redemption fever will be over by December, and may be some of the ills would have subsided too. Also the Fed is unlikely to increase interest rates and the funds would continue to flow overseas. The market is at one of its bottoms. And having slid so much, the room to go down further is getting further restricted. It is almost tempting to say that catch it before it starts moving up, for over the next 8 months you would have gained much higher than what your money in the bank can fetch you.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.