The Invisible Carnage in the Indian Markets

The function of a market is to match buyers and sellers and to aid in the discovery of a clearing price. By that definition, the Indian markets are broken. Price quotes being given out by the markets have become completely meaningless and are not prices at which transactions can clear.

Outside of the top 50 - 70 liquid large cap names, participation in the entire market has become impaired. This is not a "mid-cap" or "small-cap" phenomenon and has affected stocks across the spectrum. Volumes have declined precipitously. Companies with market caps of several billion dollars are trading a few thousand shares a day (and on rare occasions a few hundred shares a day).

While prices of stocks have declined significantly, one cannot buy meaningful quantities at these prices because sellers are on strike. However, for those who take cues about the future and about value from price signals (as most people eventually do), this is a treacherous environment.

Obviously, no one knows for sure why this is happening. One can hazard a guess that tight interest rates and the choking of liquidity by the Reserve Bank of India (RBI) has a lot to do with it. Domestic institutional investors have been relentless sellers in the market. Life Insurance Corporation of India , the big daddy among domestic institutions has been a continuous seller in order to raise funds to participate in the government's privatization program. Private insurance companies that were significant buyers of equities until a few years ago have become net sellers due to change in regulations, misconduct by companies and consequent redemption by investors. Equity mutual funds have seen net redemption by investors and the trend has accelerated recently. Retail and high net worth investors have been absent for a while from the markets.

With prices having become disconnected from underlying value, sellers have stopped looking at the market and have put away their merchandise to be sold when some sense of sanity returns to the market.

In my opinion, we are experiencing a severe case of lemmingitis (paraphrasing Ben Graham) among market participants. One must ignore price signals from the market at this time and one must take advantage of Mr.Market's melancholy wherever possible. Prices and sentiment in the market will be very different not too long from now. In hindsight, one will reminisce about the current scenario with disbelief.