Recent fall in indian stock markets a case of global integration of financial markets

International Journal of Management (IJM), – 6502(Print), ISSN 0976 – 6510(Online)
International Journal of Management (IJM), ISSN 0976
Volume 1, Number 2, July - Aug (2010), © IAEME
ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online) IJM
Volume 1, Number 2, July - Aug (2010), pp. 98-105
© IAEME, http://www.iaeme.com/ijm.html ©IAEME

RECENT FALL IN INDIAN STOCK MARKETS:
A CASE OF GLOBAL INTEGRATION OF FINANCIAL
MARKETS:
K.V.Marulkar
Assistant Professor, Department of Commerce and Management
Shivaji University, Kolhapur

INTRODUCTION:
Stock market has now become a news item since every fall or rise either small or
big gets the coverage in the news at national or even local media. Everyday, we come
across the popular indices of stock exchanges namely SENSEX or NIFTY falling down
or rising up. These fluctuations take place due to number of factors internal as well as
external. But what we have observed recently, is the sharp fall in the values or prices of
shares the world over. The causes for this fall are not merely the local or indigenous; but
more important reason is the weakness in the capital markets in the globe in general and
in USA in particular. The present paper tries to emphasize on the significance of
weakness in the global capital markets and its adverse impact on the Indian capital
market.
THE BACKDROP: ABOUT INDIAN STOCK MARKETS
Indian Stock Markets have a history of more than 130 years. Comparatively, the
Indian stock market is not as old as other developed markets in the world. But now, India
is considered as an attractive destination for the global investors. The growth of Indian
economy, even if not too rapid, is constant. Therefore, India is looked as one of the
Asian giant and very soon it is likely to be amongst the top markets in the world. The
stock exchanges in India started in the year 1875 with the inception of Bombay Stock
Exchange. But the manner of transaction which were taking place in the stock exchange,
was totally different. Initially, few brokers started the trading in the stock exchange.
This was not a formal or regulated way of trading. It started under a tree where now a
historical building of Jijibhoy Tower is established. In the early phases, the other stock

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International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)

exchanges were established in the big cities like Ahmedabad, Chennai, Delhi and after
the second world war, there has been an enormous increase in the trading in the stock
exchanges. In the last decade of 20th Century, the policy of liberalization, privatization
and globalization was announced and that increased the pace of growth of capital market
even further. During the same time, Securities and Exchange Board of India (SEBI) was
also established to protect the investors’ rights and to regulate the functions of the stock
exchanges in the country. Thus, it can be clearly understood here that, even though the
history of stock exchanges is as old as 130 years, still most of the important
developments have taken place during last 20 years only.
Now, considering the ability of Indian markets, more and more money is being
pumped in by the foreign institutional investors. This money has been also called as a
‘hot money’ as it has an ability to fly from one country to another. Since toady, India is a
better market for foreign investors, they are pumping their money in India tomorrow if
another attractive destination is identified by them, the money which is coming in to
Indian markets would easily be transferred to the another market. But still we can not
ignore at this stage that in the years to come, India can fulfill the expectations of the
global investors and remain as an attractive destination.
OBJECTIVES OF THE STUDY
Considering the importance and impact of the globalization policy on Indian
markets, it is imperative to note that the money coming in and going out of the Indian
market is also having impact on the local investors. Whenever there is inflow of funds
from foreign institutional investors, the market goes up and local investors also intend to
invest in the stock markets. But it can happen that the same money can go out of the
Indian market if the money finds a different attractive destination. This creates a panic in
Indian markets and the indigenous or local investors are badly affected by this
phenomenon. It is therefore important to study whether the Indian markets are affected by
the flight of funds from Indian markets to elsewhere and if yes, to what extent. In this
case are we really having the strong economy with strong fundamentals? The present
paper tries to emphasize on such questions and tries to find out the relationship between

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the recent fall of Indian stock markets and the global integration of the market. The
specific objectives behind this paper were as follows:
1. To find out the impact of global cues on the Indian Stock Markets
2. To find out how the globalization is contributing to volatility in markets.
HYPOTHESIS
The present paper throws light on the recent fall in the Indian Stock Markets. It
also tries to come out with possible causes of this fall. One of the causes may be global
integration of the financial markets and considering this particular phenomenon, the
hypothesis which has been formed is: “The recent crash in the stock markets world over
is an example of the integration of financial markets world over. Due to the recession
fears in the US, there has been a panic in the markets and even the better performing
markets have also participated in the global meltdown of the stock markets.”
GLOBAL FINANCIAL MARKETS
Global financial markets consist of various submarkets such as capital markets
throughout the world, money markets, mutual funds and debt funds. Among these,
capital markets (popularly share markets of the world) are more famous than other forms
of global financial markets. When it comes to a global capital market, New York Stock
Exchange (NYSE), NASDAQ from the USA, Frankfurt (Germany), Tokyo (Japan),
Shanghai (China), Bovespa (Brazil) are few of the markets where the capitalization is
higher and there has been wide spread about these markets. The equity markets
mentioned above are more popular than the money markets. As far as money markets are
concerned, London money market is looked as the most developed money market in the
world. Similary we have mutual fund market and debt fund market which support the
development of other markets like capital market and money market. Equity markets
deal with long term securities while money markets deal with short term securities.
Mutual fund industry has different schemes and accordingly some gilt funds or liquid
funds are components of money market while equity and diversified (mutual) funds are
players of the capital market. Debt funds also deal in medium term securities.
Eventhough there are several aspects about global financial markets, this paper tries to
emphasise only on the equity or capital markets. The reason behind this is that, the

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institutional investors invest their funds into the equity markets because they expect
higher rate of return in equity markets than debt/money market or mutual funds.
INDIAN MARKETS: HOW FAR DEPENDENT ON THE GLOBAL
MARKETS?
The global markets are now seem to be integrated. The fact that a sudden crash in
the US financial markets also has a negative impact on other European markets as well as
on the other Asian markets. The money which has been coming in India since last 3-4
years has resulted into unprecedented increase in the capitalization as well as the indices
of the capital markets in India. The index of Bombay Stock Exchange (BSE) popularly
known as SENSEX has gone up from just 7,000 points to almost 20,000 points in the
period of just five years. This fact is particularly relevant because prior to the year 2000,
the increase in the indices was limited. Even the index for National Stock Exchange
(NSE) which is popularly known as NIFTY gone up crossing 5,000 points which was
hovering around just 2,000 points during the initial years of this decade. One of the major
reason for such a sharp increase that we have experienced here is that a lot of inflow of
funds into the Indian stock markets. At the same time there has been increase in the US
market indices or European market indices also but the pace of the increase in these
markets was steady. The money which was invested into the Indian markets, was coming
from these developed markets through foreign institutional investors. It has already been
proved earlier also that whenever these FIIs put their funds into Indian markets, the
market goes up. The same thing has also happened with other emerging markets like
China, Brazil and Russia. Another important observation is that the domestic investment
which is taking place through individual investors or through mutual funds in Indian
markets has also the impact on these indices. But when the large flow of funds comes
into India, then only individual or retail investors invest into the stock markets. Mutual
funds houses also have been doing the same thing.
All this has been proven earlier also. Recently, the US Government declared its
fear of general recession in the economy. The immediate reaction of the US markets was
a sharp downslide in the indices of the stock markets in the US. Since the money
invested by the US investors in their country resulted in loss, these investors turned to the

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money invested by FIIs in other countries. That resulted in outflow of the funds from
emerging markets which finally resulted into the crash in emerging markets also. This is
a perfect case of global integration of the financial markets world over. Since the US is
still leader in the world markets, its impact can easily been seen on the other markets. To
illustrate it further following table provides the data relating to the collapse in the stock
markets throughout the world during the month of January, 2008.
Country/Stock Exchange Name of the index Fall in the index recorded in
January, 2008
USA-Dow Jones Dow Jones 21 %
Japan – Tokyo Nikkei 19 %
Brazil Bovespa 18 %
Mumbai - India Sensex 19 %
Hong Kong Hang Seng 17 %
South Korea Composite 18 %

It can be clearly understood from the above table that the financial markets world
over and to be specific, capital markets world over, have reacted to the fall of the US
markets during the month of January, 2008. It we try to find out the possible causes of
this global meltdown, we get the interesting observations. Some of these observations
have been elaborated here.
FACTORS CONTRIBUTING TO GLOBAL MELTDOWN
1. Recession fears in the US: There has been a feeling of general recession fears in the
US economy. The GDP growth expected during this financial year is not healthy and
apart from that, the manufacturing sector throughout the country has not been
performing well. The inflation is also high and it is expected to even go up in the
near future. This clearly gives the negative indication for the financial markets.
2. Possibility of slowdown in the Europe: What is being happening in the US, the same
is true about the Europe also. The European markets are also going through the tough
conditions. They are also experiencing pressure from the factors like inflation. There
hasn’t been a significant positive indication for the market in the Europe and hence
European markets are also participating in the global meltdown.
3. Subprime Crisis: The banks in the US are particularly experiencing this crisis.
During the first few years of this decade, when most of the markets were firm and
were having boom phase, the bank had given lot of loans for real estate. When the

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loans were being given, due to the positive indications from the sector, some
sanctions or concession were given for real estate loans. Lateron, when the boom
phase was over and economy started showing indication of slowdown, the prices of
real estate started falling down. That resulted into the loss suffered by the real estate
players (i.e. contractors, developers, brokers). This made the problem of recovery for
the banks and therefore, the banks also suffered loss in this activity. Since the
quantum of these loans was high, most of the loans were either required to be written
off to some extent or provisions were required to be done. Due to this, the
profitability of the banks was affected and further the money supply was also
restricted. Then they had no option but to pull out the investment from the market
and that resulted in selling pressure in the equity markets entailing the crash in the
stock markets.
4. The (Short) story of Strong Fundamentals: The emerging economies including India
and China were confidently asserting the strong fundamentals in the Indian markets.
But interesting point to note here is that, the US markets just signaled regarding
soaring inflation and recession and lateron, every other nation started signaling the
same fears. Therefore the question which can be raised here is ‘Do Indian markets
really have strong fundamentals?

INTEGRATION OF GLOBAL MARKETS
1. Liberalization and deregulation in the financial markets : Most of the countries have
now accepted the liberalization policy. Some nations voluntarily accepted it and
some nations were compelled to do so. But due to deregulation to some extent and
especially, due to liberalization, the foreign investment was welcomed by the
Governments. This has positive as well as negative angles but this was one of the
reason of integration of global financial markets.
2. Activities of the market participants: The market players or components of capital
market are continuously in search of better option. The instruments like hedging,
swaps and options have given a lot of scope for the market players to remain safe
even in adverse conditions. Due to such activities, there has been free flight of the
money from one market to another market.

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3. Technological Advancements: The advancements in the technology which have taken
place in the last decade have also contributed to this integration. Now since the fact
that electronic clearing and settlement, E-trading have become the part of the markets,
it is easier for the market players to operate from distant places.
4. Institutionalization: Due to the increasing institutionalization, it has become easier to
trade in the large scale. Such huge trades have the ability to determine the pace and
give directives to the markets. This has also resulted in high volatility in the markets.
The monitoring has also become simpler than the past through this
institutionalization.

CONCLUSION: WHERE ARE WE HEADING?
After elaborating the aforesaid points, it can be clear that if we have accepted the
globalization, we can not be aloof from the market trends world over. We can not be the
silent observers, but we are compelled to be the players in the market. Therefore, we
have no option but to participate in the global meltdown in the markets. It has happened
in January 2008 and it may happen in the days to come also.
But then what about the strong fundamentals which we possess? When the
markets were climbing and passing milestones one after another, we had strong belief on
our fundamentals i.e. cost effectiveness, competitiveness, other financials etc. Hence, it
can be concluded that even if we are firm about our fundamental strongness, still, if we
are globally integrated, we have to be a part of the market trends of the world over. We
can not go behind and revert the globalization policy because we also had some positive
signs of the policy and therefore we are left with participation in the global trend and the
recent fall in the stock exchanges of India is a classic example of this integration.

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REFERENCES:
1.Books
Kulkarni P.V. (Business Finance)
Kuchchal S.C. (Corporate Finance)
Pandey I.M. (Financial Management)
Avadhani V.A. (Indian Financial System)

2. Periodicals
Indian Journal of Finance (Various Issues)
The Economic Times (Various Issues)
Business Standard (Various Issues)

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