The last big crisis of which India was not a part was the East Asian financial crisis that began as late as July 1997, first in South Korea, followed by Indonesia, Malaysia, Thailand and the Philippines. All these countries had raised and maintained high interest rates to attract foreign capital. This capital raised asset prices sharply and when the currency bubble burst, asset prices crashed. The reverberations were felt as far as in Russia and Brazil in particular and emerging markets in general.

The Sensex remained unaffected. In fact, within a month of the Asian Crisis, the Sensex was up 5 per cent to 4,523. India’s currency being unconvertible was cited in policy circles as a virtue that prevented the country from joining the falling dominos of emerging markets. While the market stagnated during the next two years, by October 1999, as Asian Tigers were blaming George Soros for their plight and repairing their economies with IMF and other multilateral loans, the Sensex had crossed 5,000.

September 11 changed all that. Following the bombing of the two towers, as the world markets crashed, the three US exchanges closed down till September 17. When they opened, the Dow fell by 7 per cent and by 14 per cent by the end of the week. Meanwhile, UK was down 6 per cent, France by 7 per cent, Germany by 9 per cent. Latin American markets fell by 5-9 per cent.

This time the Sensex too collapsed. It fell by 118 points — or 4 per cent — to 3,033 the next day and by 15 per cent or 470 points within four trading sessions. This integration with world markets also coincided with a geopolitical integration as the world realised, three months later, by the December 13, 2001 attack on the Indian Parliament, that India has been and continues to be a victim of terrorist attacks. Since then, the journey of the Sensex has more or less mirrored the world markets — and that’s what happened on Wednesday. Up 2 per cent yesterday, it is for now reflecting the West (US, UK, Europe, the Americas are all up), not the East (China, Taiwan, South Korea, Hong Kong are all down).

... contd.