Mumbai: Indian equities sank to their lowest level in four months and trading activity in the cash market fell to its second lowest level in 24 months as fears of a sovereign default by Greece and mounting concerns about a domestic economic slowdown spooked investors.
Average cash-market volumes in June so far are near a four-year low and the Sensex is a mere 1% away from its 52-week low.
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Rising concerns over Greek solvency, the US economy and the uneven pace of the global recovery are likely to keep markets volatile over the next few weeks, analysts say.
Already one of the worst-performing indices this year, the Sensex fell 363.90 points, or 2.04%, to 17,506.63. The fall in the broader market was sharper, with the BSE-500 index falling by 2.16% on Monday. Stocks in the BSE-500 index account for 93.5% of market capitalization on the bourse.
After weeks of range-bound movement, the market was extremely volatile on Monday, with the India VIX, considered to be a gauge of investor fear, jumping 9.1% to 22.1.
Fears that a tax treaty that exempts inflows from Mauritius from being taxed could be reviewed and concerns over the falling value of shares that promoters of firms have pledged to take loans exacerbated the market fall.
“How can you do that? There has to be some agreement on that. Right now, it is not there in the agreement. You cannot impose it arbitrarily,” finance secretary Sunil Mitra told the Press Trust of India, in an attempt to allay investor fears.
Markets worldwide traded lower after Europe faltered in its race to save Greece from default, as finance chiefs said further aid hinged on Prime Minister George Papandreou delivering budget cuts in the face of domestic opposition.
In a statement released early on Monday, European nations called for austerity measures by Greece before other European nations sanction the next round of disbursements to the nation in mid-July. The exposure of large European banks to Greek debt have raised the fear of a contagion in case the Hellenic crisis spirals out of control.
“Global factors such as the sovereign debt crisis in Greece, end of QE2 (monetary easing) in the US and weakness in the US economy are likely to add to concerns over the Indian economy and lower risk appetite,” said Saurabh Mukherjea, head of equities at Ambit Capital Pvt. Ltd .
The World Economic Outlook report released by the International Monetary Fund on 17 June said that “greater-than-anticipated weakness” in economic activity in the US and fiscal challenges in the euro area were among the key downside risks in the global economy. Apart from global concerns, persistently high inflation in India at over 8% that could lead to further rate hikes by the Reserve Bank of India and expectations of a sub-8% economic growth rate in fiscal 2012 (FY12) would limit gains in the Indian market, analysts say.
Analysts have been downgrading the earnings estimates and Sensex targets over the past few weeks. The consensus earnings per share estimate for Sensex firms in FY12 has fallen to Rs 1,235 per share now from Rs 1,260 two months ago.
In a 20 June note, Manishi Raychaudhuri, head of research at BNP Paribas Securities India Pvt. Ltd, downgraded his end-2011 Sensex target to 20,500 from 23,600 earlier, citing lower earnings expectations.
Indian markets have fallen 14.6% in 2011, underperforming the MSCI Emerging Markets index by nearly 10% as foreign investors sold shares worth $204 million (Rs 918 crore today) so far this year after pumping in a record $29 billion in net equity investments in 2010.
“Although we do not expect markets to fall much further from these levels, the recovery in the markets would be slow until the second half of the year, when possible easing of the rate hike cycle could move the markets up,” said Sandip Sabharwal, head of portfolio management services at Prabhudas Lilladher Pvt. Ltd.
Reliance Industries Ltd, Mahindra and Mahindra Ltd and Maruti Suzuki India Ltd were the major losers on Monday.
There is a build-up of short positions in interest-rate sensitive sectors such as autos and real estate, said Siddharth Bhamre, head of derivatives at Angel Broking Ltd.
With the macroeconomic environment turning unfavourable, investors should remain overweight on defensive sectors such as IT, utilities and telecom firms such as Bharti Airtel Ltd, wrote Raychaudhuri in his note.
Mint’s Ashwin Ramarathinam and Bloomberg contributed to this story.