High volatility has made Indian stock markets more 'uncertain' than their counterparts in developed economies like the US and South Korea, and government should firm up regulatory mechanisms to usher in stability, the Economic Survey said on Tuesday.
"In terms of volatility of weekly returns, uncertainties as reflected by the Indian indices were higher than that depicted by indices outside India such as S&P 500 of USA and Kospi of South Korea," said the Economic Survey 2006-07 tabled in Parliament.
The Survey called for regulatory and other necessary steps to further facilitate enhanced institutional investment in equity markets, pointing out that this would counter-balance and cushion the impact of swings in stock prices.
The recent trend of investors' growing preference for mutual funds will enhance institutional investment in the equity market, the Survey said.
Noting the BSE Sensex's journey from the 13,000 to 14,000 mark in just 26 trading sessions, the Survey pointed out that Indian indices recorded 'higher volatility' on weekly returns during the two-year period from 2005 to 2006.
In comparision to 1.26 per cent volatility on weekly returns in the US (S&P 500) and 2.73 in South Korea (Kospi), the volatility in India ranged from 2.96 (Sensex) and 3.23 (BSE 500) to 3.21 (Top 50 Nifty) and 4.07 (Nifty Junior),
it said.
The market also saw increased daily volatility in 2006, as measured by the standard deviation of returns, partly due to a sharp sell-off during May in-line with global trends.
The price-to-earnings ratio, which partly reflects the investors' expectations of future corporate earnings, was higher than 20 per cent at the end of 2006, compared to 17-18 per cent a year ago, it said.
Economic Survey 2006-07: Complete Coverage