Survey undercurrent seen positive

The Economic Survey for 2004-05, presented in Parliament on Friday, has painted a buoyant outlook for the capital markets especially the equities segment.

In 2004, in the primary mart, the mean size of public offerings registered a steep jump to Rs 870 crore from Rs 149 crore in the previous year.

"Early indications suggest that a considerable number of issuance may take place through the public equity issues market in 2005 also," the Survey said. It, however, pointed out that the level of fresh issuances "continued to be much behind those found in developed countries."

In the secondary market, the National Stock Exchange (NSE) continued to hold on to its third place behind Nasdaq and NYSE in terms of number of transactions while the Bombay Stock Exchange (BSE) also held on to its fifth position behind Shanghai.

The Survey after doing a detailed analysis of the volatility and returns in the Nifty stocks and junior Nifty stocks has concluded that while the volatility of the junior Nifty index is higher than that of the Nifty, the gap in the price to earnings ratio between the two indices has also narrowed substantially between 2001 and 2004.

"This may reflect a percolation of liquidity and market efficiency from the top 50 stocks to a second tier of mid-cap stocks, thus giving the benefit of low-cost capital to a wider set of firms," it said.

The impact cost - which is a measure of how liquid a market is - has also been going down. For instance, according to the Survey, the impact cost for doing trades to buy or sell Rs 0.5 crore of Nifty stocks had dropped steadily and dramatically over this period from 0.27 per cent in 2001 to 0.09 per cent in 2004. The impact cost in the Junior Nifty stocks has also gone down to 0.31 per cent from 0.62 per cent in the same period.

India also has the distinction of being ranked twelfth in international standing with regard to turnover ratio (trading volume divided by market capitalisation) in the spot market in 2004. With a turnover ratio of 107 per cent, India lags behind China and Turkey.

According to the Survey, "The Indian situation appears to be broadly in the range of values seen with well-developed equity markets such as those of Japan (88 per cent) or the US (119 per cent). This suggests that in future the headroom for growth in spot market turnover in India will come from growth of the economy and of market capitalisation. Spot market turnover is likely to grow in rough proportion to the growth in market capitalisation."

The Survey pointed out that the number of accounts at NSDL - the best measure of the number of participants in the market - has grown by 29 per cent last year to reach six million by end-2004. This means that 5,400 new depository accounts have been opened per weekday.

Debunking the theory that foreign institutional investors are a dominant player in the market, the Survey says that the average trade size on the NSE and BSE cash market in 2004 was Rs 27,715 and Rs 23,984, respectively.

"This highlights the domination of individual investors in price discovery. If institutional investors had been major players in this market, the average trade size would have been much bigger," it said.