A brutal sell-off across Asia did not spare the Indian equities market. The benchmark Sensex dropped 444.55 points on Tuesday to close at 19,865.14, down 5.4% since it closed at an all-time high of 21,004 on 5 November.
China led the fall in Asia, down nearly 4% on fears that the authorities would increase interest rates and go in for administrative measures to cool down a red-hot economy that has pushed inflation to a 25-month high. South Korea raised its policy rate by 25 basis points to combat higher inflation.
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Meanwhile, there are renewed fears that high-deficit European nations such as Ireland, Portugal and Spain may default on their loans. The prices of buying protection against such defaults have climbed in the market for credit default swaps. An increase in risk aversion could suck money out of emerging markets.
These harsh economic realities have overpowered the hopes that measures by the US Federal Reserve to pump liquidity into the economy would lift asset prices. The Indian and global markets had rallied after Fed chairman Ben Bernanke hinted in a 27 August speech that a new round of quantitative easing, or QE2, was on the cards (see chart). This rally was followed by a quiet period when the markets traded in a tight range.
But share prices have dropped since the $600 billion QE2 was officially announced on 3 November. Other asset prices have remained mostly flat. Crude oil has declined by 1%, while gold has gained 0.84%.