Mumbai: The US Federal Reserve’s surprise 75 basis points interest rate cut, bringing down the US policy rate to 3.50%, could trigger a revival when the Indian markets open on Wednesday, and encourage India’s central bank to follow suit—although not in terms of magnitude—at its meeting on 29 January.
Significantly, the Fed’s cut, announced before markets opened in the US on Tuesday (and after markets closed in India), did not have a positive impact with the Dow Jones Industrial Average opening 279 points down and trading at 12,026.373, down 0.6%, at 9.30pm India time.
CREST AND TROUGH (Graphic)
Earlier on Tuesday, India’s bellwether stock index Sensex recouped almost two-thirds of the record 2,272.93 points loss it suffered intra-day to close at 16,729.94, down 875.41 or 4.97%, even as equity markets across Asia continued to fall. The Bombay Stock Exchange, which came perilously close to being closed on Monday, could not escape a one-hour closure on Tuesday after it lost 2,029 points or 11.53% immediately after the market opened. If the market falls by 10% before 1pm, it is shut for one hour.
Unlike Monday, when Sensex was one of the worst performers among global indices, on Tuesday it was relatively better placed with Japan’s Nikkei index dipping 5.6%, the deepest in the past 10 years, and the Australian benchmark index losing more than 7%, its worst single-day fall in 20 years. In China and Hong Kong, the benchmark indices plunged 7.22% and 8.65%, respectively, after falling more than 5% each on Monday.
Analysts at brokerages, both domestic and overseas, say that with the Sensex losing more than 21% in just nine trading sessions since it reached its lifetime high of 21,206.77 on 10 January, the worst is behind the market.
“There will be a small rally tomorrow (Wednesday),” predicted Anil Singhvi, managing director and CEO, Ican Investments Advisors Pvt. Ltd, a foreign fund. “To a large extent, Indian markets have corrected what was required to be corrected,” he said.
Alok Sama, founder of UK-based hedge fund Baer Capital Partners, which has invested $350 million in Indian firms, also said there could be a revival. “A lot of speculative excess in the Indian market has gone down the drain,” he added. However, Sama noted there is no quick-fix solution to avoid a recession in the US.
According to brokers, the Sensex’s 1,397-point recovery was supported by domestic institutions, including the biggest institutional investor Life Insurance Corp. of India (LIC).
Turnover on the derivatives segment of the National Stock Exchange (NSE) nearly halved on Tuesday. On Monday, trades worth Rs82,242 crore were done in this segment but on Tuesday the turnover fell to Rs44,308 crore, indicating traders were shying away from taking leveraged bets. The 50-stock Nifty has corrected 23% from its highs. It lost 309.50 points, or 5.94%, to close at 4,899.30 on Tuesday.
The segment that was most hit was options trading, turnover of which fell to one-third of Monday’s levels. Anant Rao, a derivatives analyst with ICICI Securities Ltd, said trades in the derivatives market clearly reflected the panic among investors. And investors weren’t only worried that the markets would fall further. According to Rao: “At one point when the Nifty was near its low of 4,448, traders weren’t even willing to write a call option with a strike price of 5,000 even for a premium of 170.”
Writing or selling the call option at 170 would have essentially meant that the trader wouldn’t stand to lose unless the Nifty rose above the 5,170-mark, or 16% above prevailing prices. Traders clearly didn’t want to stick their neck out even with short positions in the falling market.
The share of index derivatives in total trade has risen to about 50% in the past couple of sessions, from as low as 20-25% before the correction started. This implies traders are exercising much more caution and are increasingly hedging positions. The decline in the share of single-stock futures, at the same time, signals a drastic fall in the appetite for risk taking.
According to BSE, domestic institutions bought equities worth Rs2,778 crore (net of sales) on Tuesday even as foreign institutional investors net sold Rs4,265 crore in the cash market.
LIC, according to brokers’ estimates, invested between Rs600 crore and Rs700 crore in the market on Tuesday. “We have invested a substantial amount of money in the market, both on Monday and Tuesday,” said Sushobhan Sarkar, executive director of investments at LIC.
“Value-picking has begun among retail and high net worth individuals...,” said Harjit Singh Sethi, chief executive of Almondz Capital Markets, a domestic brokerage.
The 75 basis points cut by the Fed has brought cheer to bond dealers, too.
Vikas Agarwal, an analyst with JPMorgan India Pvt. Ltd, the Indian arm of US bank JPMorgan Chase, expects the Fed rate to help sustain the ongoing rally in the bond market.
Investors, he said, will expect the Fed cut to “potentially lead to a softer interest rate stance by RBI,”—a positive for the bond market.
(Anup Roy contributed to this story.)