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Indian markets, recovering after a 10 per cent drop, were again rattled on Tuesday, following a sharp spike in bond yields in developed markets.
Domestic stocks and bonds, as well as the rupee, witnessed a huge correction, after treasury yields in the US and Germany jumped to a year’s high (yields and prices move in opposite directions). Emerging markets such as India are witnessing a sell-off, with fund managers pulling out money to invest in higher yields in developed economies.
The benchmark stock indices and the 10-year government security (G-Sec) saw one of the worst falls in a year, while the rupee dropped to a 20-month low against the dollar.
“Due to the European stimulus, bond yields had gone one way too far. Now, they are going too far the other way. The bond market movement is spooking all markets,” said Andrew Holland, chief executive of Ambit Investment Advisors.
The Sensex closed at 26,877.48, down 2.3 per cent, or 629.82 points, the third-worst drop this year. The 50-share Nifty fell about 200 points, or 2.4 per cent, to 8,126.95, with only two of its components ending with gains. Compared to Monday’s close of 63.85/$, the rupee closed at a September 2013 low of 64.17/$. The yield on the 10-year G-Sec rose six basis points to 7.95 per cent.
“Globally, the mood has been affected, but some of that is already in the price. I am not bearish. Long-term foreign money is still looking for good stocks to buy. This is a good time for local investors to enter through the MF route, via systematic investment plans,” said Dharmesh Mehta, deputy-chief executive, Axis Capital.
In recent weeks, the ultra-low bond yields of developed economies, a prime source of capital for emerging markets, have seen a considerable rise. The spike was fairly sharp on Tuesday, amid Greece tapping its emergency reserves to repay a loan. Yields on the 10-year US Treasury rose five basis points, while that on the 10-year German Bund surged 10 basis points. Now, 10-year US Treasury yields are at their highest this year, at 2.34 per cent, against a low of 1.64 in February, stoking capital outflows from emerging markets.
On Tuesday, foreign investors sold shares worth Rs 1,329 crore (about $210 million), adding to their two-week selling tally of about Rs 12,000 crore ($2 billion).
The Indian market is down about two per cent for the year, one of the worst performers among major global markets.
Analysts said the fate of key pieces of legislation, including those on a goods and services tax and land acquisition, was spooking investors.
“As there is no domestic factor to take the market higher, global markets will dictate terms. Until the government does something to make investors feel optimistic about India, we will continue to remain hostage to global issues,” said Holland.
