Mumbai: Indian equities fell for the sixth trading session in a row as part of the sharpest correction in prices since the local stock market bounced off its lows on 9 March.
A late afternoon sell-off on Tuesday drove Indian stocks down 3% as investors booked profits on high valuations. The decline tracked falls across other Asian and European markets amid talks of central bankers exiting stimulus programmes around the world.
Some fund managers attribute the decline in equities to the strengthening dollar and an unwinding of the dollar carry trade, where investors borrow dollars at near-zero interest rates and invest them in risky assets such as equities.
Graphics: Sandeep Bhatnagar / Mint
On Tuesday, the Sensex, India’s most watched stock market gauge, declined 3.09% to close at 15,404.94, a two-month low. The broader 50-stock Nifty slid 3.14% to close at 4,563.90.
“I don’t see any abnormality in this correction,” said Jayesh Shroff, who helps manage Rs34,870 crore of assets at SBI Funds Management Pvt. Ltd. “The market had overheated to a certain extent and this is a normal kind of correction.”
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Indeed, this is the third such correction that is happening in the current rally that started on 9 March, although it’s the steepest at some 11%. Previously, the index had slipped by 10% and 8% in July and June, respectively.
At the close on Tuesday, the Sensex was trading at 18.67 times the estimated earnings for fiscal 2010. This has come down from the 21 times when it touched a high of 17,326 in the third week of October.
“Investors want to take stock of what’s happening,” said Anoop Bhaskar, who helps manage Rs73,580 crore at UTI Asset Management Co. (P) Ltd. “They have lost money on new investments with a lot of IPOs (initial public offers) and QIPs (qualified institutional placements) trading below the issue price.”
According to provisional data from the stock exchanges, foreign institutional investors sold some Rs874 crore of stocks on Tuesday. Since January, they have invested $14.2 billion (Rs66,740 crore).
The mood of caution is not restricted to India alone. Japan’s Nikkei index fell 2.31%. At 8.30pm IST, London’s FTSE 100 index of leading British shares was down 106.52, or 2.1%, as investors feared that the recent economic turnaround in the West depended on government stimulus, and that a premature withdrawal of this support might derail the recovery. In the US, the Dow Jones industrial average was down 39.22, or 0.4%, to 9,750.22 in early trading.
Following the credit crisis triggered by the collapse of Lehman Brothers Holdings Inc., central banks across the world cut rates and unleashed a wave of liquidity, while governments cut taxes and boosted spending to revive tottering economies. “The main question facing investors is when governments will start raising short-term interest rates from near-zero levels,” Kevin Scully of Singapore’s NRA Capital told Thomson Reuters. On Tuesday, the Federal Reserve starts a two-day meeting where it will decide on these rates, though it’s widely expected to retain existing low rates.
The strengthening dollar is also playing a part in this correction, others say. “I think that the unwinding of dollar carry trade is one of the reasons for the sharp correction,” said Vinod Kumar Sharma, head of private client group at HDFC Securities Ltd.
The dollar index, which tracks the movement of the US greenback against a basket of currencies, has gained some 2 points, or 2.4%, in the last 10 trading days.
The outlook for India, though, is bullish among most analysts Mint interviewed.
“I can’t see any significant fundamental reason for this sharp correction,” said G. Chokkalingam, head of equities at wealth manager Barclays Wealth India. “If you look at the recent industrial recovery, contraction in degrowth in tax revenues as well as in exports, or the recent rise in FDI (foreign direct investment), we find a lot of comfort in the market at current levels. Despite the failure of recent monsoon, we are talking of 6-6.5% GDP (gross domestic product) growth which would be the second fastest in the world.”
While the Reserve Bank of India in its latest monetary policy review last week signalled a hawkish stance citing inflation expectations, the finance minister in his annual meting with editors in New Delhi said the fiscal stimulus programme would stay because of poor rains and global economic uncertainty. The government cut excise and boosted infrastructure spending by 3% of GDP last fiscal.
Reuters contributed to this story.