Interest rates were cut by a whopping 5.2 per cent by the Reserve Bank of India in 2001-02. The cuts are based on the continued fall in the wholesale price index to which India’s inflation rate is pegged. The expectation of the Government is, of course, that the rate cuts will lead to higher investment by the industrial and value-added agricultural sector which will give an impetus to their worth on the stock markets and, in turn, will bring investors flocking back to Dalal Street. In fact, another cut of up to 5 basic points is on the cards by June this year. Guess what? None of this has happened.

While the plunging share prices can be attributed to investor fears due to the dark war clouds looming over the subcontinent, it is equally true that even before the current political crisis, the rising share market was buoyed by mergers and acquisitions and consequent open offers to the public as well as by the Government’s divestment policy which suddenly came alive and not because corporates were looking to the share markets to raise capital.

In fact, the corporate sector found a different use altogether for the massive decrease in interest rates. They took loans at the lower rate, paid off their old high-interest rate liabilities and, lo and behold, their bottom lines showed a significant improvement, despite a rise in manufacture costs and slackening demand in most industrial sectors. Their paper worth went up which made them eligible for more loans at the reduced interest rates.

The cut in interest rates appears to be counter-productive in another way, too. With interest rates at unprecedented lows, the capital market is no longer attractive to corporates for raising investment funds. The reason is the difference in shareholder perceptions in India and most other countries. Here, we still look on shares as an investment which provides returns by way of dividends—like a UTI unit or a preference share. In most countries, the dividend is virtually irrelevant; it is the appreciation in the value of the stock which is regarded as its true earning potential by the investor. In fact, more and more companies in the Western world are not giving dividends at all to their shareholders.

Digressing for a moment, this is also the reason why the Indian stock markets are beset by so many scams and scandals. When dividend and not intrinsic worth is the sole criterion of a company’s profitability, the door is open to all kinds of manipulators and fake promoters to enter the market with attractive announcements, fleece the public investors and vanish into thin air. This has happened hundreds of times in the past, the watchdog, SEBI, forgetting the dog part of its mandate has just watched it happen. That the Home Trade scam was restricted to the banks, where the general public’s money is insured, is fortunate. If, as the company had planned, it had managed to secure approval to list on the stock market, lakhs of small investors would have been sucked into the scam.