Fed taper fear returns to grip markets

India's main stock indices fell 2% and rupee sank below 63 to a dollar on Monday as foreign investors dumped shares worth about Rs 1,334 cr

The fear of a likely taper of the monthly bond-purchase programme by the US Federal Reserve returned to grip investors on Monday, spurring a sell-off in emerging-market equities and currencies. India’s main stock indices fell two per cent, while the rupee slipped below 63 a dollar, as foreign investors dumped shares worth Rs 1,334 crore, ahead of the Fed’s Wednesday meeting to decide on a cut in the existing size of the quantitative easing (QE).

Tightening credit conditions in China added to the woes of investors, worried about the prospects of the world’s second-largest economy.

The BSE Sensex dropped 426 points from its previous close to end the day at 20,707. The NSE Nifty declined 131 points to close at 6,136. The rupee ended at a 10-week low of 63.10 a dollar, compared with its previous close of 62.69.

 

NSE’s Volatility Index (VIX), a key sentiment indicator based on Nifty options prices, shot up 17.94 per cent to 18.67 on Monday, indicating traders expected more risks in the market or further declines in the near term. “Emerging markets are nervous about the extent to which the Fed might taper its QE in the coming meeting,” said Dalton Capital India Managing Director U R Bhat.

 

Wall Street is betting the Fed will cut the bond-buying programme to $65 billion, from the current $75 billion, at the end of its two-day Federal Open Market Committee (FOMC) meeting — the last for outgoing Chairman Ben Bernanke — on Wednesday. At the December meeting, the American central bank had lowered the QE to $75 billion starting January 1 (from $85 billion).

Investors are worried about further QE trimming, which will lead to a strengthening of the dollar, dry up inflows from foreign institutional investors (FIIs) into emerging market equities, including India’s. FIIs, which sold Indian stocks for a second day on Monday, had played a crucial role in keeping share prices at elevated levels in 2013 by pumping about Rs 1.1 lakh crore into domestic equities through the year. The inflows have helped the government partly fund its current account deficit (CAD). So far in 2014, these investors have bought shares worth Rs 3,000 crore.

Elsewhere in Asia, Hong Kong’s Hang Seng dropped 2.1 per cent, while Taiwan’s Taiex and Korea’s Kospi fell 1.6 per cent each. Japan’s Nikkei fell 2.5 per cent.

Among currencies of emerging markets, the rupee was the worst performer on Monday. Had the Reserve Bank of India (RBI) not intervened through sale of dollars in the market, the fall in the rupee on would have been much sharper due to selling by FIIs and high month-end dollar demand.

 

The rupee, which had opened at 62.78 a dollar on Monday, touched a low of 63.31 during intra-day trades before ending the day at 63.10. It had closed at 63.12 on November 14. Since the beginning of this month, the currency has weakened by more than two per cent against the dollar.

 

Currency market participants, however, said the rupee was unlikely to touch its all-time low of 68.85 a dollar, hit on August 28 last year. “We are much better placed than in August. Now, the current account deficit is under control and there is no reason to panic. But, there may be capital outflows from equity market; this will keep the rupee under pressure,” said Ashutosh Khajuria, president (treasury), Federal Bank. “The broad range for the rupee may be 62 to 64 a dollar over next month,” he said.

Dalton’s Bhat said: “For the rupee, a lot depends on whether the money that came into Indian debt recently would stay or fly back.”

For a sentiment revival, investors are counting on RBI to keep rates unchanged in its monetary policy review on Tuesday. “There could be a relief rally if RBI maintains the status quo on interest rates, but markets will watch the tenor of the comments,” said Bhat.