Mumbai: Capital markets regulator Securities and Exchange Board of India’s decision on Monday to reverse the policy on foreign investments in local equity through the so-called participatory notes, and the Reserve Bank of India’s move to infuse liquidity into the banking system failed to lift the market mood on Tuesday.
India’s bellwether stock index, the Bombay Stock Exchange’s Sensex, closed down almost 1%, or 106.46 points, at 11695.24. At the National Stock Exchange, the broader 50-stock Nifty index remained flat, a tad above the 3,600 level.
Despite RBI’s decision to cut the proportion of funds banks need to keep with the central bank by half a percentage point, which will infuse Rs20,000 crore into the system, the banking index of the Bombay Stock Exchange lost 2.15%.
However, the move led to a fall in the yield on government bonds. The yield on the benchmark 10-year bond fell below 8% for the first time since May. The yield closed at 8.11%, up from the day’s low of 7.98 %.
The measures failed to have any impact on the currency market as the rupee fell to its lowest—47.925 to a dollar—in more than five years on fears a global stock meltdown will force overseas investors to sell stocks here and take their money home. “The rupee will weaken further as investors continue to pull out of the equity market,” said Krishnamurthy Harihar, a treasurer at Development Credit Bank Ltd.
Theoretically, the RBI move could hurt the local currency as fresh liquidity infusion will bring down the short-term interest rates such as overnight call money rates, and this will not encourage foreign investors to build rupee assets. However, foreign exchange dealers are not attributing the fall in the local currency to the RBI measure and they say it is more to do with investors’ risk aversion.
Meanwhile, analysts and fund managers say market focus will now shift to the September quarter corporate results.
“Earnings of Sensex companies are estimated to grow by 13% during second quarter,” said an earnings preview report by domestic brokerage firm Sharekhan Ltd.
Infosys Technologies Ltd will announce quarterly numbers on 10 October.
“Volatility in IT sector stocks will remain very high ahead of Infosys results,” said Alex Mathew, head of research at Geojit Financial Services Ltd, in a client note on Tuesday.
Anil Varma and and Anoop Agrawal of Bloomberg contributed to this story.