Over the past 5 years the welcoming policies towards unknown “foreign” buyers into the Indian stock markets has created a fake bull market in the Indian stock exchanges. The P-Notes or participatory notes were even recognised to be fake by the creators of these instruments: they are called “synthetics”.

Like the synthetic materials that artificially shape a human body to perfection.
It is fake because there is nothing real about it.

Investing in India - the unreal thing.
Every morning the anchors on television channels chimed in unison that they were looking for “global cues”. They scanned the horizon for a sign of that ship - even for a shadow - to tell you where the global cues were going to lead the Indian stock markets on any given day.

For all our chest-beating, the sail winds of India Shining, India Resurgent, and Incredible India were being blown by the butterflies flapping their artificial wings in some remote financial capital.

There is nothing wrong about foreign money coming into India. But there is everything wrong about not knowing why that foreign money is coming in; how long it intends to stay; and who owns it.

But neither the BJP-led NDA coalition nor the Congress-led UPA coalition paid much heed to the warnings of the Reserve Bank of India. Bankers - the traditional ones that we thankfully have at the RBI - are, by nature, cautious. They ask questions: “Good morning. I believe you wish to invest in the Indian stock markets”, they would ask a typical foreign investor, “that is so very nice of you. But, I beg to know, who are you and what do you want from this investment in India?”

Hey, this is the 21st century and the world is fat with money sloshing around. Who has time for questions and filling in all those badly drafted FII registration forms? Just take it as it comes, baby. Turn on the P-Note tap. Flood me with your synthetics.

And so the bull market began. The synthetics came bouncing around and jiggling all over. The surging Index had the media and the government officials into a salivating fit. Every trading day for the past 5 years (approximately 1,320 trading days) the foreign investors bought a net of Rs 3 crore of stocks in every hour of trading.
About Rs 5 lakhs every minute.
Looking good, baby! Jiggle away!
And the share prices went into a dance and then into a wild dance in September 2007 when the pace quickened by 8x to Rs 24 crore every hour.
That is Rs 40 lakhs every minute.

But every dance comes to an end.
Every sailor heads back home.
The butterflies stop flapping their wings.
The mighty sail of the Indian stock market flutters in search of direction and then folds.
Marooned in a sea of red, everyone wonders what happened. The markets are down. There is no global cue on the horizon. You see the plastic on the floor - that is a residual of the synthetics. The central bankers shake their head in a “we told you so” motion. And they, like true bankers, help to clean up the mess.

The Indian slow dance.
Meanwhile, the poor Indian investor kept on giving their two-bits to the mutual funds and the Indian stock markets. No minister came to meet them in Jalandar, Patiala, or Secundrabad. No one sent them any invitations to attend any conferences in London and New York and Hong Kong about what a wonderful investment destination India is. The local investors took out 2% from their annual savings of USD 300 billion and plonked their Rs 3 lakh per minute investment into the Indian stock market. Most of this found its way into the Indian stock markets via a mutual fund or a unit linked insurance policy (a bad choice of vehicles, most likely, but that is a topic for another Honest Truth!).

This kathak-like pace is no match for the synthetic foreign investors who are now running for the exit.
Running as if they are in a disco that has caught fire. As the foreign investors dump their shares, the buying power to match that selling is just not there in India.
In simple economics, when supply exceeds demand - when sellers of shares are more than the buyers of shares - the share prices have only one way to go: down. Sharply down. Like the panic sales you have seen recently.

Shift the beat to a disco bhangra.
But this gentle pace of the Indian kathak, can turn into a sustained disco bhangra.
A bhangra that will match the selling by the foreign investors.

Another law of equilibrium in economics: when demand matches supply, prices will be stable.
So far this year foreign investors have sold USD 5 billion worth of shares. That is Rs 53 lakhs every minute of trading.
The Indians are buying at the rate of Rs 3 lakhs per minute.
“Houston, we have a problem.”
Supply (Rs 53 lakhs of selling by the foreign investors) is more than demand (Rs 3 lakhs of buying by the Indians). Ouch!
When supply is more than demand, prices have only one way to go: freefall!

There is a way to make the Indian supply zoom really quickly. This is to allow the pension funds to start buying into the Indian stock market. However, given the fact that this proposal has been sitting with the government for a few years, the reality of coalition politics will ensure that nothing will happen.

But there is another way: extend the benefits of Section 80 C.
Currently, any individual can use up to Rs. 1 lakh to buy shares (locked in for 3 years in an ELSS), repay a home loan, and contribute to a PPF. This entire Rs 1 lakh is freed from any income tax obligations.

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