Global markets, margin pressure led to crash: FM

Finance Minister P Chidambaram today made a suo moto statement in the Rajya Sabha on the May 22 stock market crash. Putting the developments in a global context, he said there was a sharp volatility in both developed and emerging markets.

"There has been a decline in Russia, China, Korea, Brazil and Indonesia. India also saw considerable volatility as part of these global events," he said.

Among the main factors responsible for the May 22 crash in India were weak sentiments, decline in global markets, decline in metal prices, hardening interest rates and comparative attractiveness of other emerging stock markets, Chidambaram added.

The fall was also exacerbated presumably on the inability of some traders who were highly leveraged to meet margin calls in time, Chidambaram added.

Chidambaram's statement also referred to the activities of domestic institutions such as mutual funds and Foreign Institutional Investors. "Even FIIs have been overall net buyers with large purchases in the derivatives market," said Chidambaram.

Data on FIIs released by stock market regulator Sebi showed FIIs were net sellers in the cash market on 22 May to the tune of Rs 1,361.30 crore.

FIIs typically hedge their cash market positions by taking reverse positions in the derivatives markets. For example, sales in the cash market are partially offset by purchases in the futures market to mitigate the risk involved in a decision.

Chidambaram assured the Rajya Sabha that genuine retail long-term investors had not been affected by margin pressures or the sudden fall. Further, banks have provided adequate liquidity to enable highly leveraged participants to meet margin requirements.

The responsibility of the government and the regulator is to ensure an orderly market. "In my submission, the India growth story remains intact," said Chidambaram.