Why talking up markets won't get good rains

Finance ministers do not like falling markets. It is seen as a sign of investors, particularly the foreign ones with vast funds at their disposal, losing confidence in Indian economy. And, finance ministers tend to take that a little personally.

Reporters on finance ministry beat have over the years gotten used to the need of finance ministers to talk up markets in the face on continued selling. P Chidambaram has done it often as the finance minister of the UPA government and now Arun Jaitley too seems to be following the same path.

Investors have been in sell off mood in Indian stock markets for most of this week. On the whole, they are selling for two reasons - anticipation of deficient monsoon that could aggravate agrarian crisis and a pause in further loosening of monetary stance signalled by Reserve Bank of India governor Raghuram Rajan on Tuesday. Poor performance of monsoon as well as pause in further rate cuts can hurt economic growth in different ways. What has also contributed to the nervousness is that the RBI has signalled a rise in inflationary risks in the economy due to uncertainties linked to monsoon and firming up of crude oil prices in recent months. Oil marketing companies have already raised selling price of petrol and diesel twice in May (effective May 1 and May 16), passing on increase in import price, and that contributes to increasing level of prices in the economy.

Both Chidambaram as well as Jaitley know all too well that it is in the nature of smart investors to take profit whenever there is negative news flow and take positions when they perceive markets are about to move up. And, institutional investors are always the first movers in the both situation.

Now, Jaitley is very annoyed that Rajan did some plain talking after announcing the monetary policy, thus making everyone jittery. Soon after Rajan was done with addressing media and analysts, the Indian Meteorological Department announced monsoon rainfall is likely to be deficient and the northwest region - primarily - the food bowl of the country would be worst affected. As a result, the BSE Sensex plunged over 1,000 points from Monday's closing of 27,849 by Thursday. The indices were in green for a few hours in Friday, but erased all the gains in the last hour of trading to close in the negative territory.

The finance minister on Thursday attempted to dispel some of the fears about monsoon and growth on Friday and assured that the government was prepared with contingency plans. For the moment, not many are convinced. After all, everyone has access to monsoon forecast and impact on agricultural production in poor monsoon year. Also, corporate earnings have been dismal last financial year and no one is sure there will be much of a pick-up this fiscal.

In such a situation, sugar-coating a bitter reality is unlikely to soothe frayed nerves. The government could do well to focus on making good of what looks like a bad situation with right policy measures to minimise the impact of monsoon failure instead to accusing others of spreading fear. Sure, governor Rajan could have been less negative in the outlook he painted. But does that help anyone?

And, as we say in the face of any adversity, be prepared for the worst and hope for the best. If monsoons turn out well, then it is the government that will get credit for preparing for the worst. Remember Cyclone Hudhud that battered our east coast last year and preparations for it, anyone?