Mumbai: Indian shares had their steepest one-day fall in six months as foreign investors got spooked by the growing controversy over telecom. Fears about weak corporate governance in smaller firms, expectations of further hikes in interest rates on the back of rising inflation and margin calls by brokers worsened the sell-off.
The Bombay Stock Exchange’s Sensex dropped 454.12 points, or 2.3%, on Thursday, to close at 19,242.36.
The markets have under-performed peers over the storm that has broken over the allocation of spectrum for second-generation (2G) mobile services since mid-November. The Sensex has dropped 3% since then while the MSCI Emerging Markets Index has been flat.
Analysts expect stock markets to be volatile in the next few weeks, with the sentiment turning negative for Indian stocks despite strong economic growth in recent quarters and consensus estimates putting earnings growth at 20% for fiscals 2011 and 2012.
“Investor sentiment is bad, and more so for mid-caps and small caps,” said Dhiraj Agarwal, director (India institutional equities) at Standard Chartered-STCI Capital Markets Ltd. “While there are no large institutional sellers yet, buyers seem to be stepping away.”
A ban by market regulator Securities and Exchange Board of India on the promoters of four companies from trading on bourses raised concerns over corporate governance and prompted some investors to make a hurried exit from many smaller firms, as speculation about more investigations under way gained ground.
The BSE mid-cap index has corrected 10% since 2 December while the small-cap index has fallen 14%.
The decline in small and mid-cap stocks pushed up the margin requirement on them, forcing sales, said Dipen Shah, senior vice-president (private client group research) at Kotak Securities Ltd.
“In some cases, investors resorted to selling large-cap stocks to fund their margins, which were due with the lenders,” he said.
Margin funding allows an investor to purchase stocks by paying only a part of the price, the rest being funded by the broker.
If the share price falls below the purchase price, the investor is asked to put up additional margin. If clients are not able to meet that requirement, the broker may be forced to sell the stock to avoid further losses.
“Many retail and high networth individuals have been forced to unwind their leveraged positions because of the sharp correction in the market,” said Sandeep Sabharwal, head of portfolio management services at Prabhudas Lilladher Pvt. Ltd.
Another issue that weighed on the mind of investors is inflation pressure that could lead to further increases in interest rates by the Reserve Bank of India (RBI), raising costs for companies and impacting valuations.
RBI governor D. Subbarao said on Thursday that inflation remained above acceptable levels, signalling borrowing costs may be raised for a seventh time since March.
While rising inflation and the consequent expectation of a rate hike are cause for worry, the various allegations of wrongdoing seem to be the biggest market dampener, even as macroeconomic indicators look robust, according to most analysts.
“I think both inflation and scam-related issues are at play,” said Bharat Iyer, head of research at JPMorgan India Pvt. Ltd. “But there is only so much you can do about inflation and the more pertinent issue I think relates to the scams and the corporate governance issues, which have come to the fore now.”
While analysts affirm India’s domestic demand-driven growth story and expect markets to continue attracting foreign investments, the outlook for the near term does not appear too bright. Most analysts predict volatility in the trading sessions ahead. The Sensex has corrected by nearly 8.4% since its recent closing high of 21,000 on 5 November.
Although some brokerages such as Credit Suisse and Goldman Sachs have advised investors to remain underweight on India because of valuation concerns, the current decline is mostly because of local issues, analysts said.
“With a current account deficit, India is best positioned to attract capital flows, although the sentiment currently might not be very favourable,” Iyer said. “We are looking at returns of 15% in the year ahead.”