The UPA has finished two years, and things look gloomy (Shankar Acharya). The achievements of the UPA include:
- Quotas in schools; threats of reservation in the private labour market
- Mandal-style conflicts all over again (politics)
- The fundamental threat to public finance posed by SEZs
- The 6th pay commission
- The Arjun Sengupta report (Gautam Bhardwaj, Susan Thomas, Sunil Jain).
- The stalled PFRDA Bill
Global factors are part, though not all, of the story. A global `emerging-markets-factor' appears to have taken a beating. India and South Korea are more liquid, when compared with other emerging markets, so these two countries are likely to both do well when times are good and do badly when times are bad. The second thing that seems to have changed is global risk expectations. The VIX is back up to 18%, after slumbering for months at around 12%. I don't fully understand what a higher implied volatility on the S&P 500 does to global general equilibrium.
Ila Patnaik argues that while there are serious problems in the world, the current gloom on Indian stock prices is substantially derived from domestic problems, and less from global factors. Business Standard has two excellent editorials, one ruminating about what has happened to the UPA, and another interpreting recent movements in the stock market.
As with May 2004, a lot is made of margin calls generating positive autocorrelations. The story told is: market goes down, then margin calls hit, and market goes down further. This is plain wrong because derivatives trading is a zero sum game. For each person bleeding a marked-to-market loss promising himself he will never trade again, there is another with a marked-to-market profit. who feels he is a hero who made the right call. In fact, May 2006 was a bit easier on the risk management systems as compared with May 2004, for two reasons. First, the biggest move we have seen in this episode was smaller. Second, margins went up over a period of a few days in response to a slow escalation of volatility. In contrast, in May 2004, margins went up more suddenly.