Mumbai: It all happened almost before you could blink.
Monday was like no other day in the 133-year history of the Bombay Stock Exchange (BSE). Investors were expected to give a warm welcome to the new United Progressive Alliance (UPA) government to be led by Manmohan Singh, not dependent on the support of the Communist parties and hence free to pursue economic reforms to get the economy back on track.
What happened was astonishing—in two short trading sessions that jointly took less than 60 seconds, equity prices blew away the roof and investor wealth rose by Rs4 trillion, despite relatively thin trading volumes worth Rs3,103 crore.
India’s bellwether equity index, the Sensex, rose 17.34%, its highest-ever single day rise both in percentage and absolute terms. The broader 50-stock Nifty gained 17.74%, or 651.50 points, to close at 4,323.15.
Also See Scaling New Highs (Graphics)
Investors and traders did not have the time to encash their gains as trading was halted for the day, for the first time ever, in the two exchanges because of the surge in stock prices.
Current stock market regulations have provisions to halt trading for an hour each if the index moves by 10% and 15% of recent prices in the course of a single trading day. A rise or fall of 20% ensures that trading is stopped for the day, as was the case on Monday.
The first halt took place seconds after the 9.55am opening, when the Sensex gained 1,307 points. When trading resumed at 11.55am, it again took just seconds for the index to breach the circuit-breaker.
These limits are revised every quarter, and a BSE statement said that these would not be revised for Tuesday’s trading even as two TV channels—CNBC-TV18 and NDTV Profit—reported that the market regulator met the exchange officials to discuss Tuesday’s trading.
Brokers and analysts said markets are likely to open up on Tuesday, too, as a number of traders and investors were unable to trade on Monday and around Rs20,000-25,000 crore of short positions had been built before the electoral verdict was announced.
“A good part of this rise could be attributed to short covering,” said Atul Bhadkar, who works in the trading floor of Edelweiss Securities Ltd.
Short sellers sell shares they don’t own in anticipation of prices coming down. When prices go up, they have to place immediate buy orders to cut their losses.
“Clients want to buy. They have nothing else to say,” said R. Sriram, a technical analyst at ICICI Securities Ltd. “There are still a lot of short positions pending. Investors will bang their boots and come in to cover them. There could be another circuit-breaker,” he said.
Other markets moved in tandem. Indian shares and depository receipts listed in Europe and the US, too, rose on Monday. The rupee closed at 47.92 to a dollar after trading in a tight range in the last few weeks due to uncertainties surrounding the elections. It rose 3.1%, the most since March 1986.
There was a rally in the bond market, too, but it could not rival the currency market rally as the bond market is still reeling under an oversupply concern as the government is set to borrow at least Rs3.62 trillion to bridge its widening fiscal deficit in 2010. The yield on the 10-year bond closed at 6.31%, from its previous close of 6.42%. It had dropped to 6.20%, but was checked by profit taking by banks.
Despite the 2,110 point rise in the Sensex, there was unease in the markets. One concern was that brokers and traders would have to pay additional margin money to the stock exchanges before trading starts on Tuesday for the losses on short positions that they will have to face after Monday’s rise. Margin money is paid by the holder of a trading position to cover the risk of a default and is a safety mechanism to ensure that such losses do not snowball into a payments crisis. If they don’t do that, their trading terminals will remain shut till the exchange squares off positions on behalf of the brokers. This could result in another round of gains for the market in early trades.
“Sebi (Securities and Exchange Board of India) should order an investigation into how the market moved up to break the circuit filter on such low volumes. When people were clamouring for a probe when circuits were broken on the way down, why shouldn’t it happen now?” said Arun Kejriwal of Kejriwal Research and Investment Services, an investment research house.
Sebi chairman C.B. Bhave was quoted by a television channel as saying the market regulator was keeping a close eye on the market. There was no cheer from the market gains for investors in mutual funds too. The Association of Mutual Funds in India (Amfi), a trade body representing fund houses, declared Monday a non-transaction day. This means investors who placed orders to buy or sell units of mutual funds on Monday could not do so and the net asset value (NAV) of each unit of a scheme still reflects Friday’s closing price of shares.
“The NAV of a unit of a mutual fund scheme is arrived at by taking the share price of scrips at close of trading hours. Today, since it was an extremely truncated trading session, with no trades executed, in the interests of investors, we have collectively decided to keep NAVs at Friday’s level,” said A.P. Kurian, Amfi chairman. Though analysts expect the bullish trend in the equity markets to sustain for some time, they sounded a cautionary note, as apart from short-term stimulus, government policies could take some time to have an impact on the economy and corporate earnings.
“When there is a decisive change in trend, there is always an element of overshooting,” said Bharat Iyer, head of research at JPMorgan Chase and Co.’s securities unit. “While this will last for a while, one can’t rule out a phase of consolidation down the line. There’s a lot of expectation getting built into the pricing and investors will keenly await the government’s initiatives.”
The combined fiscal deficit of the Centre and states stands at around 11% of the gross domestic product. This has led to doubts on India’s financial strength and global agencies have raised red flags about India’s current sovereign rating, according to Standard Chartered Bank. A downgrade in rating would put India in the junk category and affect capital inflows.
“The government will have to find new ways to make money and not blow it up,” said N. Sethuraman Iyer, chief investment officer of Shinsei Bank’s India investment unit.
“The big question—is it (the big bang in the markets) a game changer?” asked Rohini Malkani in a Citigroup Global Markets Inc. note. “Can India get back to the high growth, high valuation of recent years? This event probably does open up meaningful possibilities, but there’s a lot to do, and there could be a lot in the way.” Morgan Stanley raised its end-2009 target for Sensex to 15,300 points, a rise of 7% from current levels, saying companies would benefit from the election victory. “We now believe, that there is greater probability of our bull case rather than our bear case,” analysts Ridham Desai and Sheela Rathi wrote in a note.
The Sensex extended its year-to-date gain to 48% from 26%, surging to first from last among the so-called Bric countries, including Brazil, Russia and China. Among global benchmarks, only Peru’s stocks have performed better. The Indian market now trades at 15.6 times earnings, twice the 7.7 multiple of November, data compiled by Bloomberg shows. That’s still lower than China, at 26.8 times, or Brazil. The price to earnings ratio is calculated by dividing the price of a share by per share earnings.
Pooja Thakur of Bloomberg, Saikat Chatterjee and Pratish Narayanan of Reuters and Ashwin Ramarathinam contributed to this story.
Graphics by Ahmed Raza Khan / Mint