The Ultimate Cost of Information Asymmetry !!

The US sub-prime crisis and sceptical outlook of future has led to the downfall of stock markets all around the world, and India is not an exception. Since the very onset of sub prime crisis the FIIs have been pulling out money from the Indian stock market, which also lead to several sharp downfalls in Sensex and Nifty. In 2007-08 financial year the net FII outflow from BSE (Equity) alone was around Rs 6500 crores and from May 08 to Sep 08 the FII outflow form the equity markets in India reached around Rs 25000 crore. The interesting point is that during this period the FII inflow into Indian secondary debt market showed a strong positive trend.

Now the question that can be raised is that whether our financial analysts, who feature in TV shows around the clock on various business channels that are on air, were not prudent enough to recognise this trend and predict the recent series of downfalls in the equity market? Even after watching this trend most of them were advising people to invest and were having a bullish outlook, though a few cautioned the investors by giving inkling to book profits.

Or is it a case of information asymmetry where small investors, who do not have access or expertise to understand these technicalities and blindly follow their advice, invest their hard earned money into the market, were manipulated by the advisers. The thinking and sentiments of a common man is influenced to a great extent by these advices, also the analysts talk in jargons or highly ambiguous statements which are difficult to comprehend. Not only private players, even government came out with explanations like strong economic fundamentals which invoked small investors to invest in highly fragile market. There is no denial of the fact that the Indian economy has strong fundamentals (also indicated by net positive inflow Indian secondary debt market) but the prediction of bloodbath in the Indian stock market should not have been that difficult taking into account the liquidity crunch and heavy financial losses at international level and negative sentiments of FIIs about Indian equity market for over an year by now.

Unfortunately, the worst part is that cost of this information asymmetry has not restricted itself to financial losses but has culminated into lives of people. Newspapers are full of reports of suicides committed by various people across India who incurred huge losses in the recent down run of prices in the stock markets. Who is responsible for it? The role of media is to reduce information asymmetry and report the happenings as they are, leaving the interpretation to individuals. The question remains unanswered; the only thing we can hope for at this point of time is that Sensex, Nifty at least stabilizes at these levels, so that such sad events do not occur again in near future……………

Original Thoughts

Tanmay Kumar Gupta