A brokerage firm employee reacts ixn Mumbai. (AP)

More questions and answers on the stock market crash

Who are most likely to be affected by the stock crash?

Anybody who parked his money in a tradeable security is going to feel the heat. But there are some sectors that have been badly singed: real estate, infotech and banking. But the crash also affects companies that will find it harder and more expensive to raise money from cash-strapped lenders.

What are the fundamentals the finance minister is talking about? Are they really strong?

The Indian economy is still looking robust with growth forecast anywhere between 7.5 and 8 per cent. Among large economies, it comes in second behind China where growth is about to dip below 10 per cent. It has a large talent pool, wages are low, and the domestic demand remains reasonably firm. It still remains averse to risk; its banks are well capitalised and covered for risks. All the talk about a recession is out there in the West; there isn’t a hint of it over here.

Everybody is saying foreign institutional investors (FIIs) are taking money out and that is why stocks are falling. If so, why are FIIs pulling out?

The FIIs had invested $18 billion in Indian equities last year; they have taken out $11 billion this year. Most of these FIIs have huge exposures in the US, which has been hit the hardest by the credit crisis. Many of them have had to cover their losses; others prefer to hold money in cash or liquid assets during a market turmoil.

If FIIs are taking back the money, does that mean our foreign exchange reserves are getting depleted?

In May, India’s foreign exchange reserves had swelled to over $314.6 billion — the highest level till date. By September 12, it was down to $289.5 billion. A large chunk of this comes in the form of export earnings, equity investments, capital transfers, etc. FII investment is only a small portion of the total figure. The FIIs took out $5.2 billion between April and August this year, which is a piffle when you look at the size of the forex reserves.

Recession is looking all but inevitable in the UK. Will it have any impact here?

A recession anywhere in the world will hurt exporters to those countries hardest. India is not a very heavily trade-dependent economy. It accounts for less than 1 per cent of global trade. In 2007-08, Indian exports were valued at $159 billion, less than 15 per cent of its GDP. Some sectors will face trouble: software, gems and jewellery and textiles. Most others rely on domestic demand.

What about America? Is it facing a recession now?

Talk of a recession looms; but it is still only talk. The figures don’t bear out talk of a recession. The US had a 2.5 per cent growth in the first quarter of 2008 and 2.1 per cent in the second quarter. That was better than the growth figures in the corresponding period in 2007 — 1.3 per cent and 1.8 per cent.

However, the IMF has forecast that the US economy will grow by 1.6 per cent in 2008 (against 2 per cent in 2007). It reckons the US economy may contract in the final quarter of 2008 (October-December) and the first quarter of 2009. But the good news is that it expects the US economy to stabilise in the second quarter of 2009.

If the US does slip into recession, how will it impact India?

The US accounted for 13 per cent, or $20.7 billion, of India’s total exports of $159 billion in 2007-08. So, it is a significant importer of Indian goods. But some things have started to change. The UAE emerged as the largest single export market for Indian products during April-May 2008 with a share of 10.4 per cent, marginally ahead of the US (10.3 per cent), which has been the largest single export destination till now. Clearly, the exporters are already hedging their bets.

How bad can things get in India and how long will this downturn last?

No one can predict how long this downturn will last. The IMF expects the US economy to stabilise by the second quarter of 2009. But there are some who believe a downturn, once it begins, can go on for three years.

This crisis has been compared with the Crash of 1929. Let us just remember that that downturn dragged on for four long years.

And if you are talking of market recovery, then here’s the clincher: the heights that the Dow climbed in 1929 weren’t scaled till 1958 — that is 29 years. Even the biggest pessimist doesn’t expect it to take 29 years before we see the sensex scale 21000 again.