Mumbai: The benchmark index of the Bombay Stock Exchange, the Sensex, and the rupee fell sharply Friday, following the lead of US markets that closed sharply down Thursday and Asian and European markets that continued to be roiled Friday—a result of the ongoing credit crisis that originated in the US, but had since spread to Europe and Asia.
The Sensex experienced its worst week ever, closing 15.95% down over last Friday’s close.
On Friday, US markets opened sharply down and touched their lowest in five-and-half years. The Dow Jones Industrial Average was trading at 8,264.66, down 3.67% at 8.45pm India time. The index’s early performance, however, is no indication of how it will close—for most part of this week it has lost substantial early gains to end in the red.
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Friday’s sharp fall in the Sensex and the local currency made India the worst performer in Asia for foreign investors thus far in 2008, with aggregate losses on the 30-stock bellwether and the rupee touching 70%.
Both the equity market and the currency would have fared worse if not for the intervention of the banking regulator early Friday to announce a full percentage point cut in banks’ cash reserve ratio (CRR), which defines the amount of cash that commercial banks need to keep with the Reserve Bank of India (RBI), three days after paring it by half a percentage point, to ease the mounting pressure on liquidity.
The combined one-and-a- half a percentage point in CRR, effective on Saturday, will release Rs60,000 crore into the system.
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RBI also cancelled two auctions of government bonds worth Rs10,000 crore scheduled for Friday, to prevent draining money from the financial system.
The overnight call money rate that rose to 23% on Friday morning came off its peak after the CRR cut was announced and the yield on the benchmark 10-year paper ended the day at 7.78%, against 8.06% on Wednesday, but bankers and financial sector analysts do not see a lasting solution to the liquidity problem unless the currency market stabilizes. Banks borrow from each other in the overnight market to take care of their temporary asset-liability mismatches.
From bad to worse: An online trader in Mumbai reacts after the benchmark Sensex continued to slide. Shashank Parade /PTI
The rupee dropped to its historic low of 49.26 to the dollar on Friday, but recovered to end the day at 48.38 to the dollar on aggressive greenback sales by RBI. For every dollar the Indian regulator sells in the currency market to stem the fall of the Indian unit, an equivalent amount of rupee is sucked out of the system and this contributes to the liquidity crunch. The rupee has lost some 18% since January against the dollar. One of the reasons behind the continuous fall in the rupee is the drying up of portfolio investments this year. Foreign institutional investors have taken out more than $10 billion (Rs48,700 crore today) from Indian markets this year after pumping in $17.36 billion last year.
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Announcing the CRR cut, an RBI statement said: “Market participants are assured that the Reserve Bank stands ready to respond swiftly to meet any liquidity requirements that may arise in the context of the highly volatile external situation.”
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Reiterating its commitment to maintaining financial stability and liquidity management “using all policy instruments”, the Indian central bank said it is “monitoring developments closely and continuously and would respond swiftly and even pre-emptively to any adverse external developments impinging on domestic financial stability, price stability and inflation expectations and the continuation of the growth momentum of the Indian economy”.
“The placing of domestic financial stability ahead of price stability in the statement suggests a…dovish turn… We think that that financial sector concerns are gaining the upper hand over inflationary concerns for the central bank,” said Goldman Sachs in its Asia Policy Watch, released immediately after the central bank’s policy announcement.
India’s Wholesale Price Index rose 11.80% in the 12 months to 27 September, below the previous week’s annual rise of 11.99%, a government release said on Friday.
In morning trades, the Sensex traded perilously close to the lower circuit, down 1,088.60 points, or 9.6%, to around 10,200 levels, last seen in July 2006. The index closed at 10,527.85, down about 800 points, or 7.1%. The National Stock Exchange’s broader 50-stock Nifty index closed at 3,279.95 points, down 6.65%.
All Asian markets fell on Friday. Japan’s Nikkei dropped about 10%, Australia fell 8.3%, Singapore 7.3% and Hong Kong 7.19%. The Jakarta Composite index once again witnessed more than a 10% fall.
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Apart from liquidity, Indian stock were also hit by news on slower industrial growth. India’s Index of Industrial Production saw the slowest growth in about a decade, by 1.3% during August compared with 10.9% during the same period in 2007.
“A year ago, we were talking about the rupee appreciating to 35 against the US dollar (and adding to index returns from India); now it is close to 50 and Sensex is already down about 50% this year,” said Fraser Howie, head of structured products at foreign brokerage CLSA Asia Pacific, in a telephone interview from Singapore.
Howie expects a prolonged bear phase globally and more rate cuts from India’s central bank, to support the local economy, markets and the India growth story.
“In recent times, I haven’t seen the RBI move so decisively and so frequently,” said Parthasarthy Mukherjee, president of treasury at Axis Bank Ltd.
Abheek Barua, chief economist, HDFC Bank Ltd, said the CRR cut would not lead to a reduction in banks’ lending rates.
Local bankers said that the CRR cut was much needed with liquidity drying up in the system, with banks holding back disbursements.
Indeed, liquidity seems to be the main concern of the monetary as well as fiscal authorities at this point. “We have identified that the main problem is liquidity and we have assured the people that we will respond swiftly and take steps to infuse more liquidity according to the needs of the situation,” finance secretary Arun Ramanathan said in a press conference in New Delhi.
Panel on liquidity
The government has constituted a committee to look into the liquidity issue and this will submit its first report in a week. The panel, headed by Ramanathan, includes T.S. Narayanasami, chairman of the Indian Banks’ Association; U.K. Sinha, chairman and managing director of UTI Asset Management Co.; Y.M. Deosthalee, chief financial officer of Larsen and Toubro Ltd, the country’s biggest engineering company; and R.M. Malla, chairman and managing director of Small Industries Development Bank of India.
Chanda Kochhar, joint managing director and chief financial officer, ICICI Bank Ltd, said the reduction in the CRR “should have a cooling effect on the market and ease liquidity. ICICI Bank has adequate rupee liquidity in the context of the current environment. ICICI Bank also has liquidity of Rs12,000 crore in its overseas subsidiaries. The bank has never used rupee funds for its international growth initiatives’’.
The CRR cut will release close to Rs4,000 crore for ICICI Bank, she said.
Concerns about ICICI’s exposure to fallen investment banks and its international operations have taken a toll on the bank’s stock and prompted everything-is-fine statements from the bank’s management, RBI, and the country’s finance minister.
Goldman Sachs expects more moves by RBI to ease liquidity and “the probability of a rate cut at the 24 October policy meeting has increased”.
Keki Mistry, vice-chairman and managing director of India’s oldest mortgage firm Housing Development Finance Corp. Ltd, said: “The CRR cut was needed as the liquidity was drying up in the system”. He added that this move could result in the postponement of a possible rate hike.
Neeraj Swaroop, regional chief executive, Standard Chartered Bank, said the reduction in the CRR immediately eases the liquidity tightness in the domestic money market and also bolsters the rupee, which has been “under pressure on account of eroding risk appetite’’. According to him, the cut in CRR is unlikely to act inflationary as “whatever (money) is injected, gets mopped up when RBI intervenes in the forex market”.
A meeting of the G-7, or a Group of Seven developed countries, scheduled late Friday in Washington, DC was “boosting the dollar on expectation that (its) foreign ministers and central bankers will come up with some bold steps to unblock the flow of credit in global markets”, said Dilip Raghuwanshi of Asit C. Mehta Forex Pvt. Ltd, in an email note.
More pain for Sensex?
According to brokers and fund managers, the Sensex still has some excess to shed compared with many global markets, which are now trading at levels last witnessed in 2003.
“In the short term, markets can still fall; if you don’t have the courage to take short-term losses, stay away from equity,” said Nilesh Shah, deputy managing director and chief investment officer at ICICI Prudential Asset Management Co. Ltd, that manages about Rs50,000 crore worth of assets.
Domestic funds fear that investors could pull out money, as the continuous fall in the market could create panic.
Brokerages have also stopped predicting the bottom of the market and very few are talking about the next support levels for the Sensex or the Nifty. “Once the market stabilizes, only then can you take a call if it has bottomed,” said Anoop Bhaskar, head of equity at UTI Asset Management Co.