The Indian stock market has experienced an unprecedented boom as well as volatility since the UPA Government came into power with the promise of ‘reforms with a human face’. Around 1500 companies are listed on the Indian stock market but the top 30 companies account for as much as 25 percent of the market capitalization. Market capitalization is a value arrived at by multiplying the share price with the total number of shares issued by a company. With the share price of most companies touching their highest ever levels, the total market capitalization of all the shares listed on the stock market is now around Rs.60,00,000 crore (USD 1500 billion). This is nearly one-and-half times the Gross Domestic Product (GDP) of the country!

Share prices in India are tracked through the 'Sensex' which is based on the share price of 30 companies having the highest market capitalization. Share prices of April 1979 form the Sensex base of 100.

The Sensex went up by nearly 2.7 times in two years. The government justified and celebrated this abnormal share price appreciation by claiming it to be due to the strong ''fundamentals'' of the economy. An increase of 4500 points in four-and half months between mid-August to November 2007 cannot be on the basis of economic ‘fundamentals’! The Sensex had taken 15 years to reach 4500 level before this boom started. For the ruling class, GDP growth rate is the only fundamental economic parameter that matters. GDP growth rate has been 8-9% for the last four years, which is much less than the rate of increase in share prices.

From the sharp increases and falls in share prices, it is clear that the share market is completely under the domination of speculators. Only 35 lakh people in the country invest in shares. Most small investors stay away from the stock market having burnt their fingers in repeated scams and collapse of share prices.

By the government’s own admission, share prices have boomed recently due to investment in Indian shares by foreign institutional investors (FIIs). These institutions are generally pension funds, mutual funds, hedge funds, private equity funds, insurance companies and large banks that are all the time looking for places to earn higher and higher return by investing their large capital.

FIIs control a very high percentage of tradeable shares in a majority of Sensex companies of the country. Nearly 50% of the shares are owned by Indian and foreign promoters, which are generally not traded. FIIs own more than 36% of tradable shares of these companies, which makes FIIs the most dominant investor group. In 25 out of 30 Sensex companies, FIIs control more tradeable shares than the ‘Indian public’.

Given the high degree of control of tradeable shares by FIIs, they exert significant influence on share price movement of Sensex companies. The fact that only about 1000 registered FIIs control such a significant section of the share market, gives them more market power than any other market participant. Under these circumstances, a sudden increase or reduction of FII investment in the Indian stock market leads to chaos and sharp increase or fall in stock prices. This is the primary cause of the volatility of Indian stock market.

Another cause of volatility is that major stock exchanges around the world are interconnected "around the clock" through instant computer link-up: volatile trading on American market, "spills over" into the European and Asian stock markets thereby rapidly permeating the entire financial system of the world. A few global players drive all markets. Since these financial entities tend to behave in herd-like fashion, rushing into particular markets and instruments when the profit seems good and withdrawing together when uncertainty strikes, their decisions determine the buoyancy or lack of it in most markets of the world.

Foreign institutional investors are estimated to have pumped in around Rs.45,000 crore ($10,700 million) into India's markets in 2005 and a further Rs.22,000 crore ($ 5,000 million) by May 2006. When they decided to pull out around Rs.8,500 crore ($2,000 million) between May 11 and May 25, 2006 a sharp downturn ensued.

Over the past few months, Sensex has soared by over 5,000 points to touch record levels. Much of this boom has been again fuelled by foreign investors who have pumped in more than Rs.18,000 crore ($4,500 million) in shares of big Indian companies over one fortnight alone. This year, net inflows by foreign portfolio investors have exceeded Rs.70,000 crore ($17,500 million).

The factors underlying the heavy inflows of foreign institutional investment into India's stock markets are now well known. Indian government has, since 1993, freely allowed foreign investors to buy and sell shares in India and given them a number of tax incentives to encourage them.

The interest rates and the potential profit rate of big corporations in the growing sectors of economy in India are much higher than in international markets. FIIs therefore borrow from countries like Japan where interest rates are very low and invest in India to take advantage of the higher interest rates and potentially high profits.

Recent FII inflows are also driven by expectations of further appreciation of the rupee. The problem is that when investments are attracted to the Indian market with expectations of speculative gains from rupee appreciation, such capital flows themselves push up the value of the rupee. Larger the inflow of foreign capital, greater is the tendency for the rupee to appreciate. The rupee has appreciated by 12 percent over the past one year. The more the rupee appreciates, greater is the flow of foreign investment to earn additional profit from rupee appreciation, besides the profits from booming stock prices. And more the FII investments, more does the stock market boom.

So the stock market is like a casino, a place for gambling, where speculators try to influence both the Sensex and the value of rupee against dollar, for earning super-profits. A rapid rise in stock prices does not reflect the creation of new value. It reflects the concentration of already created value in fewer and fewer hands. In other words, the stock market enables a small minority of super rich individuals to become richer as rapidly as possible, at the expense of all others in society.

The stock market is of great importance to the big business houses. How it is used by them to enrich themselves and how the working people are hurt directly and indirectly by the games played on the stock market needs to be understood by all. This will be further elaborated in the subsequent parts of this essay.