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Indian indices today saw their steepest fall in a day in 21 months, while the rupee tumbled to a new record low, tracking the weakness in global markets and currencies after the US Federal Reserve signalled a tapering of its monetary stimulus, stoking fears of portfolio outflows.
Fed Chairman Ben S Bernanke yesterday said the central bank would cut back on its monthly bond-buying later this year if the economic outlook continued to improve. Fresh fears about China’s manufacturing sector and liquidity squeeze also weighed on market sentiment, especially in Asia.
Foreign institutional investors today net-sold stocks worth Rs 2,094 crore, according to provisional data. This is the highest selling by foreign investors in a single day since August 2011. In June so far, FIIs have sold to the tune of Rs 2,890 crore, while they have net-bought worth Rs 80,000 crore since January. Domestic institutions net-bought shares worth Rs 1,332 crore today. (BERNANKE SPOOKS MARKETS)
“The market was hopeful that the quantitative easing (QE) would continue but that didn’t happen. This caught the market off guard,” said India Infoline Chairman Nirmal Jain.
The Bombay Stock Exchange benchmark Sensex fell 526.41 points, or 2.7 per cent, to close at 18,719.29, the highest single-day fall since September 2011. NSE’s Nifty declined 166.35 points, or 2.86 per cent, to end the day at 5,655.90. “The Indian market is highly vulnerable to foreign investor sentiment,” Jain said. He expects the markets to decline by 5-10 per cent in the near term.
The US stock markets, too, opened in the red. At the time of going to press, the Dow Jones Industrial Average had fallen 1.96 per cent from its previous close, while the Nasdaq was down 2.09 per cent.
The Bank of New York Mellon India American Depository Receipts (ADR) Index dropped 3.4 per cent to the lowest since September in early New York trade. ADRs of Wipro fell 2.3 per cent to $7.09, the lowest since October, while the Infosys ADRs retreated 2.3 per cent to $39.99 and Tata Motors’ declined 2.6 per cent to $23.92.
The rupee, Asia’s worst-performing currency, dropped to a record low of 59.96 a dollar in intra-day trade and would have easily slipped below the 60-a-dollar mark if the Reserve Bank of India (RBI) had not sold dollars to support the rupee’s slide. The Indian currency, at 59.58 a dollar, closed 1.46 per cent lower than its previous close.
“The US Fed’s stance was more hawkish than the market expected. We have seen bond outflows on fears of QE tapering. Now, there is a possibility that even equity will be reallocated from the emerging markets to developed nations. This poses the risk of further depreciation,” said Samiran Chakrabarty, managing director and head of research (India), Standard Chartered Bank.
The spectre of the impact of the rupee’s weakening further against the dollar is weighing on the minds of FIIs and the government alike. Even as the government today put up a brave face, with Chief Economic Advisor Raghuram Rajan saying India was not short of options to tackle the rupee’s fall, investors remain worried that the dollar’s strengthening might not end anytime soon.
“Apart from the talks of withdrawal of QE3, the market’s reaction is also on account of the dollar strengthening,” said JPMorgan Managing Director (Equity Capital & Derivative Markets) Vinay Menon.
In a poll conducted by Business Standard, currency market participants said they expected the rupee to fall below 60 a dollar soon and stabilise below that level in a month. Since the start of May, the currency has weakened 11 per cent against the dollar. Bond market participants said further weakness in the currency would reduce the chances of RBI cutting rates in its policy review in July (after it kept rates untouched earlier this week).
