Kargil Scars Skin-Deep

As Indian planes went down over Kargil, the bourses started hiccuping badly. Market players were unnerved by the sudden turn in sentiments. Says Sandeep Ghate, director, Securex Investments: "On several occasions in the past, the market in a free-flowing bull run has been stymied by the news of conflict on the border." The market encountered some unbelievable battering, even though the manner of its crash indicated short-sellers were pretty much absent. On May 27, the bse Sensex crashed by more than 125 points in the last half-hour of trading. On May 28, the Sensex closed at 3773 points, with a net loss of 233 points over the close of the previous week.

But the story changed the week after. For each 50-plus fall in Sensex, the markets bounced back. Says Amit Mitra, secretary-general, ficci: "Minor border skirmishes have been on for years and have had little impact on the economy. Markets plummeting on the first day was more because of panic, as was clear from their recovery the next day. The economy is stable and in no danger of collapsing." Indeed, it was clear last weekend that the markets were getting on an even keel, with the Sensex having recovered by over 100 points.

The border battle also sent the foreign exchange market into a tailspin. On June 1, while the Sensex fell by 51 points, the rupee fell by 10 paise to 42.94 against the dollar on the inter-bank forex market. Dealers attributed the fresh fall to three major factors-heavy demand due to Indian Oil's import covering, the May 31 memorial holiday in the US and UK markets, and fresh airstrikes and reported entry of two Pakistani planes into Indian territory.

But if the markets have been rattled by the skirmishes, the economy is untouched. While finance minister Yashwant Sinha has said the shelling would not have a "destabilising effect on the economy", industry associations see the strong signs of recovery as wind in their sail. Says Tarun Das, director-general, cii: "I don't see any damage happening to the economy. Industrial recovery is on its way and we recently did a joint survey with National Council for Applied Economic Research (ncaer) that showed the economy relatively stable." ncaer has predicted a 5.7 per cent gdp growth for 1999-2000.

Even trade with Pakistan may not be hit. Says a cii spokesperson, "The business communities of both countries have learnt to carry on trade irrespective of what happens at the government level or on the border. Besides, such a situation isn't new and we have had flashpoints on and off for the past five decades which had hardly affected our trade relations. " Official imports of Pakistan from India comprise bare necessities and procuring them from other markets would not be cost-effective for Pakistan, a heavily-indebted state still reeling under the impact of sanctions. That the borders haven't yet been closed are seen as pointers to normal trade. "The worse that can happen is that cash payment may replace letters of credit," says a Mumbai exporter.

Industry and market operators agree that the conflict won't dent the economy to any great extent. Asks Jairam Ramesh, general secretary (economic cell) of the Congress: "What's wrong with the economy? The fiis are absolutely positive and have not acted adversely." Agrees Srinivasan, whose asset management fund just picked up Rs 1,000 crore in assets: "The first lot to get scared by any possibility of war would be the fiis and they are not worried. They are finding new opportunities in the downslide." Observes Milind Nandurkar, fund manager, Sun f&c Asset Management Co: "If Indian corporates could produce better results and the economy continues on its upturn, then corporates can easily ride over this month-long disturbance. As the fiis observe this and discover that the valuations are attractive, they will again eye the market."

Optimism over the economy is so high that no one expects the fights to blow up into a full-fledged war. On the other hand, it's this nascent recovery that runs the risk of being nipped in the bud if the problem aggravates. Says Srinivasan: "One certainly hopes that there is a quick end to the tension. With the economy in such a delicate state, the last thing we need is a war." Agrees Ramesh: "If the fighting escalates, then (like all other sectors) its impact will be felt by the economic barometers."

There are several reasons for business optimism. Pakistan's economy isn't doing well. Not too long ago, it had to be rescued with funds, compromising its military and nuclear stance. India, too, has recognised the need to ensure that its position on nuclear testing isn't misunderstood as war-mongering. More, both countries are running neck and neck in terms of missile launching technology. Says broker Sumedhu Shah: "In other words, the chances of the current skirmish escalating into a war don't seem high, though the conflict will surely continue for some time, given the difficult, hilly terrain."

Adds Roy Mascrehans, another punter at the bse closely following wire news: "The strategic infiltration may have been a smart move to outsmart both the Indian army and intelligence. As the main action is on the Indian side, with suitable international lobbying, India can still work out a plan to reclaim its territory. And if that's the judgment, the current scare would give a good opportunity to fund managers to pick up scrips at attractive prices".

Ultimately, fund managers have to weigh risks and rewards at this juncture. In the worst-case scenario, the value of rupee would be the greatest victim. Says K.N. Dey, senior vice-president of Mecklai Financial Services: "Rupee-dollar parity will be most sensitive during these days. Despite comfortable forex reserves, if the situation aggravates, rupee might dip again." Even interest rates may be raised to contain inflation, in the event of war. According to a J.P. Morgan report released last week, the greatest threat to bond markets stems from a steep rupee slide. "However, there's a remote possibility that the rbi will defend the currency by hiking interest rates as in January and August '98," it states. J.P. Morgan has advised bond traders to desist from enlarging their positions in high-risk, long-term government securities; "prices have marginally reacted, though the drop has not been too severe. .."

Srinivasan sums up the prevailing mood: "Three months from now, the skirmish would have lost its scary dimension, and stock prices would move up again. Any fund manager who invests now can look forward to a short-term appreciation of 30 per cent. We have lived with the border problem for long, and it is unlikely to turn into a Kosovo or Palestine now." Currently, punters are betting on the Sensex reaching 4500-5000 levels before Diwali.