Markets in bear hug amid Russian monetary squeeze

Sensex sheds 538 pts, rupee weakens to 63.54/$ as Moscow jacks up rate to 17%, Brent falls below $60

The Indian stock markets posted their steepest fall in more than six months on Tuesday and the rupee dropped to its lowest level in more than a year following a sell-off in global markets triggered by a further fall in oil prices, an emergency interest rate increase by Russia and Chinese manufacturing PMI data coming at the lowest level since May.

Brent crude oil prices fell below $60 a barrel for the first time since July 2009, sparking concerns over global economic growth. The sharp increase in interest rates from 10.5 per cent to 17 per cent by Moscow to stem the fall in its currency spread panic across emerging markets.

Declining for the seventh time in the past eight trading sessions, the S&P BSE Sensex ended at 26,781.44, down 538.12 points, or 1.97 per cent, its worst single-day fall since June 8. The broader Nifty declined 152 points or 1.85 per cent to 8,067.6, its lowest level since October 28.

The falling oil prices saw markets in West Asia, including Saudi Arabia and Dubai, plunge over seven per cent. The decline in most other Asian markets such as Singapore and Indonesia was in line with the Indian markets.

The widening of India's trade deficit to an 18-month high in November at $16.86 billion (the data came after market hours on Monday) and a surprise contraction in China's factory sector in December (the first time in seven months) also hurt investor sentiment.

"The slide in oil prices has hit the market quite badly. Overseas investors have started taking money out of India. Domestic macro data released in the past one week have also disappointed," said U R Bhat, MD, Dalton Capital Advisors.

With China being the largest consumer of metals in the world, metal prices were down. Domestic metal stocks thus took a beating, which saw the BSE Metals index emerge as the biggest loser, down 4.17 per cent. Foreign institutional investors on Tuesday sold shares worth Rs 1,247,24 crore, provisional data showed. FIIs have pulled out Rs 3,328 crore from the Indian markets in the past six trading sessions.

According to Neelkanth Mishra, managing director-equity research, Credit Suisse, the drop in oil prices is negative for the Indian market as it will hurt exports, which will erode the benefit on the current account deficit side.

Mishra said FII flows could taper as the oil price decline would impact flows from oil producing countries, which are big exporters of capital. The banking sector index on Tuesday fell three per cent, the most since January. Shares of State Bank of India and ICICI Bank fell more than four per cent each. Investors feared the drop in the domestic currency could delay the interest rate easing cycle. Yields on the 10-year benchmark government bond rose over 10 basis points.

"Worries about Russia and Venezuela have had an impact on emerging market sentiment, which could have led to further selling in emerging markets. Investors should let the dust settle for a few days before deploying their capital. It is better to miss the first one-two per cent of a rally than risk losing capital," said Andrew Holland, CEO, Ambit Investment Advisors.

The sharp dip in the stock market and expectations of a rate hike by the US Fed after a meeting over the next two days have weighed on currency movements. Oil importers have been buying the US currency to benefit from the slump in global prices. The rupee, which has been resilient so far this year, backed by a surge in money brought in by foreign portfolio investors in the capital market (equity as well as debt), seems to be losing steam as seen from the trend in last few trading sessions. It fell by 59 paise to close at 63.54 to a dollar on Tuesday.

While the recent correction has seen the Indian market give up over 5 per cent from its its all-time high recorded on November 28, on a dollar-adjusted basis, however, it is down nearly 8 per cent. Some market experts believe the rupee could fall to 65-66 levels against the dollar. Since FIIs look at dollar returns, it is not surprising to see them take some money off the table after a strong rally in the last 12-15 months.

"The decline in crude oil prices has created macroeconomic instability in countries such as Russia and Venezuela, leading to risk aversion in the capital markets. Most Indian investors have been looking for a correction; this gives them a good opportunity," said S Naren, CIO, ICICI Prudential AMC.

Companies with exposure to emerging markets saw their stocks take a hit. Smaller stocks fell by a bigger margin as compared with the Sensex and the Nifty. The BSE Midcap Index was down nearly 3 per cent, while the Smallcap Index was down 3.4 per cent.

The uncertainty in global and Indian markets saw gold prices rise. The international prices of standard gold and silver were up 1.9 per cent each and the domestic prices jumped by 2.5 per cent and 1.2 per cent, respectively. The nervousness in the local equity market could also be seen from the 16.3 per cent spike in NSE's India VIX index, a measure of the market's expectation of volatility in the near term.