First things first: Who so-ever wishes to trade or invest in the Indian stock market today must have the ability to control his/her nerves at a moment of extreme volatility. Fear and greed are the factors that prevail in any stock market all the time, but they seem to be running at high voltage right now in the Indian stock market.

The downfall in the global markets since the second week of May 2006 did not impact the Indian stock markets initially. But it became difficult to ignore this trend for even the local players when foreign institutional investors (FIIs) started selling here too as a global strategy. From Nasdaq Composite index to Nikkei 225 of Japan, all the major indices of the U.S. and Asia started falling May 09 onwards. In the Indian market, the trend reflected a couple of days later, as FIIs started selling Indian stocks since May 11. And, that was the day when Sensex, the benchmark index of India dipped by 177 points or 1.4% to 12,435. In the 3 consecutive days, Sensex lost almost 800 points including the fall of 463 points or 3.8% on May 15. Though it recovered by 52 points next day, it was a highly volatile market as Sensex saw a swing of 576 points. Next day was also as dramatic. As if the Indian market decided to defy the global trend, Sensex opened with a positive gap of 89 points to only scale a gain of 344 points or 2.9%. The gain came through despite the FII selling continuing, thanks to domestic mutual funds that used the fall as an opportunity to buy.

The domestic funds turned net buyers of $80 million on May 12, when Sensex registered a fall of 150 points, and followed the same strategy on the next trading day—May 15—with net buying of $176 million, when the fall in Sensex was deeper at 463 points.

The real drama, however, was yet to come. In the evening of May 17, TV channels started flashing the worries of FIIs to be treated as ‘traders’ for the purpose of tax calculation against the current norm of accepting them as ‘investors’. The worries originated from a circular of Central Board of Direct Taxes (CBDT), a wing of the finance ministry, which was interpreted as indicating the same. Although, it was only a ‘proposal’ put in public domain for seeking opinion of interested parties, it made the market mood jittery, because the implication of treating FIIs as ‘traders’ instead of ‘investors’ was huge. Under the ‘trader’ category, the FIIs would have to shell out 41% tax compared to 10% short-term capital gain tax as of now being considered as ‘investors’.

The market meltdown across the globe coupled with the fear of FII selling caused havoc on the bourses. The Sensex dipped by more than 500 points within few minutes of market opening on May 18. And finally the day ended with a loss of 826 points (6.8%), the highest in absolute terms in the history of Indian stock market.

The finance minister Mr. P. Chidambaram clarified latter in the evening of May 18 that the government has been considering the FIIs as investors only, hinting that there is no change in the policy. The clarification ignited the hope that the market will recover next day, and the hope seemed to prove right in the early trade on May 19, as the Sensex improved by more than 300 points in the morning. The market, however, couldn’t sustain the gains, as many traders found themselves in the trap of margin call. To add salt to the wounds, the Communist Party of India (Marxist) raised the demand of re-imposing the long term capital gain tax that had been withdrawn a couple of years back. The demand by left party that came during the market hours only, hammered the market again, resulting in the Sensex losing 453 points (3.98%) again.

With almost 11% dip in the Sensex, the week ending May 19 turned out to be the worst week for the Indian stock market. The Sensex slipped from 12,285 on May 12 to 10,939 on May 19. During the week, the worst performing industries were metals (down 22%), capital goods (down 13.3%), consumer durables (down 12.9%) and healthcare (down 12.7%).

The Sensex has lost 1104 points or 9.2% Compared to the end of April 2006, and 1733 points or 13.7% from the all time high of 12,671 registered recently on May 11, 2006 only.

Every crisis in the history of stock market has latter or sooner turned out to be an opportunity, and the case is no different here. The basic question, however, is whether the worst is over or not. The indication may be taken from the figures of FII and domestic fund transactions on May 18; the day Sensex registered its biggest fall of 826 points. The net selling by FIIs on the day was $180 million, which is not a big amount for a day like this. On the other hand, the domestic funds continued their buying support with net purchase of $171 million (Rs. 762 crore) on May 18 using the ‘opportunity’ to buy at lower levels.