Mumbai:Indian stocks staged a dramatic recovery on Monday tracking early gains in Europe after the region’s central bank was said to be buying Spanish and Italian bonds to ward off defaults, but lost ground by the close of trade as European shares reversed their advance.
BSE’s bellwether equity index, the Sensex, hit an intraday low of 16,759.45 points, losing at least 3% in early trade as a rating downgrade of the US by Standard and Poor’s (S&P) triggered panic selling across Asian equity markets. It closed at 16,990.18, down 1.82%.
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The 50-share Nifty of the National Stock Exchange (NSE) recovered from an intraday low of 5,054.05 points to close at 5,118.50, down 1.78%.
All major Asian indices ended in the red, with the Shenzen SE Composite Index declining 4.43% to top the losers.
The fall may continue on Tuesday with the Dow Jones Industrial Average dropping 357.27 points, or 3.12%, to 11,087.34 at 10pm India time.
The panic was palpable, with policymakers rushing to reassure investors that necessary steps will be taken to cushion the impact of a fresh bout of global economic uncertainty stoked by US and euro zone sovereign debt worries.
Even before the markets opened, India’s central bank issued a statement saying it was monitoring the global situation and would “respond quickly and appropriately to the evolving situation”.
The Reserve Bank of India (RBI) said the Indian banking system does not face any immediate liquidity stress, and it vowed to ensure adequate rupee and forex liquidity.
Assurances also came from finance minister Pranab Mukherjee, Planning Commission deputy chairman Montek Singh Ahluwalia and the government’s chief economic adviser Kaushik Basu in a concerted effort to give comfort to investors.
Mukherjee said India’s growth and strong fundamentals make it better placed than other economies to tackle the uncertainty in global markets.
“There could be some impact on the capital and trade flows. But as India’s growth story is strong, we could see FIIs (foreign institutional investors) seeing India as an attractive investment destination even if there is any temporary outflow,” Mukherjee said, citing higher returns offered by the country. “(We are) ready to take action to ensure financial stability and liquidity in financial markets.”
Basu said the market turbulence was a panic reaction and “should the need arise, the government and the central bank are in a position to step in. But barring the immediate reaction to what is happening now, the India story remains robust”.
Ahluwalia was cautious and admitted that there would be some impact if there was global financial instability.
While stocks fell, gold continued its uninterrupted record-breaking rally and rose to a new high at the domestic bullion market as investors rushed to buy the yellow metal, historically considered a safe haven during turbulent times. Silver rebounded sharply, riding heavy speculative demand.
In Europe, gold gained 2.37% to a record and surpassed the psychologically important $1,700 (Rs 76,500) an ounce (28.35g) mark.
Brent crude dropped 2.9% to $106.19 a barrel and the Indian currency slipped further to close at 44.9875 to the dollar, lower than Friday’s close of 44.735, but stronger than the intraday low of 45.0650—a level not seen since 28 June.
Bond prices rose and the 10-year benchmark yield fell 5 basis points to close at 8.26%, its seven-week low and a level last seen in July before the Indian central bank raised its policy rate by 50 basis points to 8%, on speculation that turmoil in global financial markets will prompt the central bank to pause interest rate increases.
One basis point is one-hundredth of a percentage point.
US investment bank Goldman Sachs upgraded India to “market weight” from “underweight”, given a likely turn in the macro cycle, lower oil prices, lower valuation and policy reforms. There weren’t too many takers for this, with S&P saying a new global financial crisis would hit Asia harder than the last one, especially nations heavily exposed to offshore markets or still repairing budgets from the 2008-09 crisis.
The agency has not predicted a rerun of the credit crisis that crippled markets and tipped the world economy into recession three years ago, but warned of more sovereign downgrades in Asia next time around, if its assumptions turned out to be wrong.
“A theory that emerging markets are decoupled from the developed markets is not quite right. Like many other European markets, Indian indices have not been positive this year, though the two economies follow different dynamics,” FTSE Group deputy chief executive Donald Keith told Mint over the phone.
Experts say corporate earnings, government policy moves and global challenges will play a crucial role for the markets in the long run.
The Indian markets are likely to be range-bound between 16,000 and 18,000 for the next few weeks, according to Yogesh Kalwani, head of investment advisory at BNP Paribas Wealth Management.
“The markets will start moving up once the headwinds start receding; corporate earnings start improving, which is expected to happen third quarter onwards; and resumption of the government’s policy action. We are factoring in a 3% decline in Sensex EPS (earnings per share) estimates. If there is no rate hike in the forthcoming RBI policy, markets will take it positively,” he said.
In short term, foreign fund flows will be negative, but Kalwani said domestic institutional investors will provide support to the market, which is a positive. “If global conditions do not change much from here and the interest rates stabilize, the markets should be close to 19,000 levels by December-end,” he added.
FIIs sold shares worth a net Rs 1,385.78 crore on Monday, according to NSE data. Domestic institutions were net buyers at Rs 1,320.38 crore. Life Insurance Corp. of India, which has a target to buy equities worth Rs 60,000 crore this fiscal, was seen buying stocks on Monday.
Domestic institutions have bought stocks worth Rs 14,000 crore so far this year.
FIIs have bought Indian stocks worth $1.6 billion so far this year net of sales, after pumping in a record $29.32 billion last year.
“The current sell-off could bring valuations in India to very attractive levels from a medium-term perspective, though the subsequent upmove may not be very sharp and there could be a consolidation period thrown in between,” said Deepak Jasani, head of retail research at HDFC Securities Ltd.
While Goldman Sachs cut its growth outlook on India by 10 basis points to 7.7%, the US investment bank said Indian equity markets may moderately outperform the Asian region on a six-month basis as the price-to-earnings valuations for the MSCI India Index are just 14 times forward earnings.
In the calendar year so far, the Sensex, down 17.16%, is the worst performer among major Asian indices.
“The near-term outlook for equities may not be very exciting and the mood is still sombre... India could follow the direction of developed markets in the near term, but differ in magnitude as the situation in India is much better than that in the developed markets,” Jasani said.
“For India, the domestic issues of high inflation and interest rates are having a more direct impact on our growth prospects and I see these peaking in the next quarter or two, until when markets could remain range-bound,” said Dinesh Thakkar, chairman and managing director of Angel Broking Ltd.
Neeraj Gambhir, managing director and co-head (fixed income) at Nomura Financial Advisory and Securities (India) Pvt. Ltd, said: “In the medium term, we are still bullish on India’s growth potential. It continues to be primarily a domestic consumption story and there are upsides on account of potential large infrastructure spending.”
According to him, if the uncertainties lead to commodity prices softening, it will be positive for India and the local currency is likely to strengthen. “If, however, further quantitative easing in Western economies leads to substantial strength in commodities, it’s not good news for India. In that situation, the current account deficit will widen and the rupee will weaken,” he said.
Graphic by Ahmed Raza Khan/Mint
Anup Roy and Ashwin Ramarathinam, and Reuters, Bloomberg and PTI contributed to this story.