It was easily the blackest of Mondays: On May 17, the Sensex closed 564 points down, the BSE PSU index plunged 430 points, and the Bankex another 355 points. Add the losses of the previous trading day (Friday, May 14), and the Sensex had hurtled into the red by nearly 900 points, with foreign investors, point out dealers, selling close to $1.5 billion (Rs 6,800 crore) worth of shares. With uncertainty clouding government formation, party members-most of whom will never make it to the Centre-speaking in multiple, anti-reforms voices, and still others threatening to unleash populist measures like increased subsidies, the stockmarket experienced one of its scariest days ever. "Unless stability is brought about via the formation of a government, consequent statements from the cabinet ministers such as the finance minister on key policy issues are made, a common minimum economic programme is agreed upon, investors will continue to be negative. Crores of investor wealth will be destroyed, which will affect the purchasing power in the economy and alter the fundamentals and perceptions of the country," warns Nimesh Kampani, Chairman, JM Morgan Stanley. Echoes Andrew Holland, Chief Administrative Officer & Executive VP (Research), DSP Merrill Lynch: "All we've heard so far is negative news. Till we hear some key announcements pertaining to government formation and allocation of key economic portfolios, there will be uncertainty and panic."

May 17, 10.20 a.m.

What happened on Monday, May 17 was unadulterated terror. Fear prior to the formation of a coalition government that is-to put it mildly-making ambiguous and contradictory sounds about the continuity and pace of economic reforms. Within 20 minutes of opening, the Sensex as well as the National Stock Exchange's S&P CNX Nifty had shed 553 points, and 182 points respectively- a 10 per cent across-the-board crash. The markets could well have hurtled deeper into the red had it not been for the daily market-wide circuit filter that was triggered for the first time since it began operational in mid-2001. As per the regulations, trading was halted for an hour on both exchanges. This filter comes into play at three stages of the index's movement, at a 10, 15 and 20 per cent swing either way.

11.15 a.m.

Those expecting the bloodbath to end in an hour were dealt a ruder shock. By around 11.15 am, trading was first recommenced on the NSE, and minutes later on the BSE. The toll this time round: the Nifty down 276 points and the Sensex a mind-boggling 787 points. This time the 15 per cent filter had been hit. Trading would now be halted for two hours.

OPERATION BAIL-OUT? NAH

SBI: Badly mauled ONGC: No more the stockmarket's darling There is very little that any government, even if it was firmly entrenched, could have done to stop the largest ever free-fall of the market in Indian history, believe most analysts. The reason, as Navin Agarwal, Head of Research, Motilal Oswal, points out is that the government just doesn't have the kind of funds to make up for such huge outflow of funds, especially by the foreign financial institutions. Remember that the FIIs had pumped in around $10 billion in the market in last one year and even if the government had asked the financial institutions such as Life Insurance Corporation, Unit Trust of India and the State Bank of India, they could not have really controlled the bleeding. However, that is not to say that a firmly established government would not have helped. First, some of the irresponsible statements, which brought the markets crashing down in the first place, may not have happened. Secondly, a firm statement from the finance minister could have stopped the slide much earlier. And finally, the government would have asked the financial institutions to come to the rescue of the government as it did in the case of the Harshad Mehta scam of 1992 and the Ketan Parekh scandal of 2001. However, asking the government's financial institutions to bail out the market comes at a huge cost, points out Arvind Virmani, Chief Executive Officer, Indian Council for Research on International Economic Relations. "Such solutions are fraught with dangers and the Unit Trust of India is a clear example of how institutions can deteriorate if they are asked to bail out markets time and again,'' he adds. Surjit S. Bhalla, Managing Director, Oxus Research and Investments, believes that the RBI could have intevened in the initial stages (first 20 minutes of trading in the morning) by adding greater liquidity to the market, rather than wait for so long. RBI, for instance, could have ensured easy loans to banks at cheap rates, which in turn could have lent to the brokers to take care of their margin problems. The RBI could also have helped by reducing the margins required by brokers for a short period, till the crisis was taken care of. And that's precisely what the US Federal Reserve System under Alan Greenspan did when the US market lost nearly 23 per cent on a single day, October 19, 1987, losing around $ 500 billion in one day to save the market. He also helped pump in a lot of money to prevent the insolvency of commercial and investment banks. Various governments have come to the rescue of their markets whenever there have been problems. During the South-East Asian crisis of 1987, the Hong Kong government pumped in more than $ 10 billion to shore up its currency. But then, as Sunil Sinha, Consultant, National Council Of Applied Economic Research, points out, currency risks are very different from market risks. First, there is a longer period when the outflow takes place and secondly, there is a central bank with a lot of money to bail out a country in times of currency risks. -Ashish Gupta

By now, marketmen were pouring out of their offices on Dalal Street in protest as margin calls were triggered after the first phase of the crash, thereby only succeeding in sending the indices crashing lower once the markets opened the second time round. (That's because if a trader has bought shares with borrowed funds he has to pay additional margins when markets crash. If he can't pay up the lender will typically sell those shares, thereby adding to the carnage). Explains Kampani: "Once the markets fall, and there's a margin call, more selling happens, which in turn creates more panic, resulting in a further fall, and further margin calls. It's a vicious circle." The fear is that many brokers may be trapped.

It wasn't long before Congress leaders like Manmohan Singh came out with statements, assuring investors that the government will do whatever it takes to ensure a healthy working stockmarket. But clearly that wasn't enough to balance out the negative sentiment created by Left leaders' statements dealing with the scrapping of the disinvestment ministry, a disinterest in the disinvestment of profit-making public sector undertakings (PSUs), and an emphatic "no" to a hire-and-fire enabling exit policy. There's also a fear that populist measures- such as increased subsidies for farmers and an unwillingness to hike petrol and diesel prices despite global oil prices hitting record highs-would be resorted to by the Congress-Left combine in a bid to reinforce its pro-poor image, which in turn would do further damage to the already-burgeoning fiscal deficit.

1.15 p.m.

When trading did begin the third time around 1.15 pm, the Reserve Bank indicated that it was willing to provide liquidity to banks in order to help them meet their payment obligations, and that helped prop up the market a bit. But by just a bit, and the BSE Sensex closed the day 564 points lower, just above the 4,500 mark. Sums up Mihir Kothari, Head of Sales at broking house Motilal Oswal: "At the beginning of the day there was some nervousness around, but nobody expected this! The biggest problem was the fear, which resulted in barely any volumes. Everybody wanted to sell, nobody wanted to buy."

When BT went to press on Monday, uncertainty was still at peak levels, what with government formation, and the drafting of a common economic programme still some days away. The markets may have not much of a downside left, but to spark off a renewed rally will call for some well-directed investor-friendly salvos aimed at Dalal Street from the government in waiting.