Mumbai: India’s benchmark indices bucked the trend and closed at record highs even as indices of most large Asian markets, except South Korea, posted losses after the US Federal Reserve (Fed) announced a 25 basis points cut in the Federal?funds?rate, the third such cut since September.
With Fed announcing several measures, which will increase liquidity, on Wednesday (US time, well after the Indian markets had closed), Indian indices will likely open on a high on Thursday.
Earlier, Fed’s move on Tuesday disappointed a section of investors, who had expected a deeper cut to arrest the deterioration in financial market conditions and increasing uncertainty surrounding the outlook for economic growth in the US. The Dow Jones Industrial Average, the benchmark equity index of the US, lost more than 2.1% to close at 13,432.77 points, following Fed’s announcement.
None of that had any impact on the Indian indices on Wednesday. The Sensex, the benchmark index of the Bombay Stock Exchange (BSE), closed at 20,375.87 points, adding 0.4%, while the broad-based 50-stock Nifty index of the National Stock Exchange (NSE) gained more than 1% to close at 6,159.30.
On Wednesday, Fed announced further moves to add liquidity to a credit-strapped system, including a move by it in concert with other central banks, including the European Central Bank and the Bank of England, to launch a new temporary-term auction facility that would relieve pressure (or scarcity) in the short-term funding markets around the world. In response, the Dow jumped 215.17 points to 13,647.94 as the New York Stock Exchange opened for business. It was trading at 13,606.40?at?8.30 pm?India time.
According to brokers in Mumbai, Wednesday’s surge in the markets can be explained by the fact that local funds continue to be bullish and are still buying at current levels. The sharp gains made by mid-cap and small-cap stocks also reflect the confidence (of investors) in the market, they said. The BSE mid-cap index gained 1.66% and the small-cap index 1.8%. According to provisional data provided by BSE, foreign institutional investors made net sales of equities worth Rs385 crore on Wednesday, while local mutual funds made net purchases worth Rs115 crore.
Analysts say the 7.3 percentage points rise in India’s index of industrial production (IIP), from 4.5% in October 2006 to 11.8% in October 2007, helped local equity markets go against global cues. The government released the IIP data during trading hours on Wednesday.
“Wall Street’s regular rate cuts, like most drugs, is having less beneficial effects each time,” said Richard Ensor, managing director of London-based Euromoney Institutional Investor Plc. “With the economic prospects in the US and Europe deteriorating, and with interest rate cuts failing to stimulate, the bear markets in these economies look to become more established.”
Cheaper money in the US does not necessarily mean inflows into emerging markets, Ensor said. “The Fed rate cut will not increase inflows to emerging markets despite the talk of decoupling, and the relative strength of both the India and China equity markets. Emerging markets generally should perform better than developed markets but they will not remain unaffected by bear market contagion,” he warned.
All leading Asian stock indices, including those of Japan, China, Hong Kong and Singapore, recorded losses while South Korea’s Kospi ended relatively flat with 0.1% gains. The Hang Seng index, which lost more than 2.4%, was the worst performer across Asia. “Some investors feel the Fed action fell short of expectations,” said Kazuki Miyazawa, market analyst at Daiwa Securities SMBC. “There is growing uncertainty over the US economy,” he added. And Macquarie Equities director Lucinda Chan said investors had hoped US interest rates would be slashed 50 basis points and they showed their disappointment when Fed delivered a cut only half that size.
However, most markets in Asia managed to recover some losses in late trade as investors took the view that the initial sell-off was excessive.
“The US banks were facing severe pressure in the inter-banking market,” said Joshua Felman, senior resident representative of International Monetary Fund. “The banks were facing the challenge of raising funds after reporting big losses. A deeper cut would have reduced the tension in the money markets. However, too much liquidity would have created inflationary pressures and this is a worry for the Fed.”
US housing woes have triggered multibillion-dollar losses for major banks that snapped up mortgage-backed securities during a housing boom. This, in turn, has led to a credit crunch as banks become wary of lending to each other. It has also led to higher short-term interest rates.
Global stocks had enjoyed a strong rally since the start of the month on hopes of another US rate cut and a White House plan to help struggling American homeowners meet their mortgage repayments.
In India’s case, the IIP numbers could have helped. “The IIP numbers could have acted as a counter-weight that helped Indian markets gain even as all other markets lost,” said Felman.
However, Tushar Poddar and Pranjul Bhandari of Goldman Sachs (India) Securities Pvt. Ltd, in their Asia Economics Research report, released on Wednesday, said notwithstanding the bounce back in October IIP numbers due to the base effect (or low numbers in the corresponding period last year), growth in industrial production is moderating and will continue to do so in the rest of 2007-08 due to high interest rates, rapid currency appreciation and slowing external demand.
AFP and Reuters contributed to this story.