Mumbai:Indian shares extended their losses to 10% from a recent peak as investors pulled out money from equities worldwide on escalating fears that European debt woes would damage the global recovery.
The rupee slipped to its lowest level in eight months as foreign institutional investors (FIIs) continued their relentless selling in the share market and the dollar rallied against most currencies as money fled to safer US bonds and gold.
Photo: Mitesh Bhuvad /PTI; Graphic: Paras Jain / Mint
A drop of at least 10% in share prices is usually considered a correction while a 20% fall is a sign of a bear market.
On Tuesday, the Sensex slipped to a three-and-half month low, shedding 2.7% to close at 16,022.48. On 7 April, it had touched a high of 17,970.
The rupee ended the day at 47.70 to a dollar even as the offshore market priced in a further fall in the Indian currency.
Europe is “turning out to be messier than what people thought”, said Vinod Kumar Sharma, head of private broking and wealth management at HDFC Securities Ltd. He doesn’t see respite from the battering anytime soon.
In India, foreign investors have pulled out some $2 billion (Rs9,480 crore) in May, reducing their net purchases this year to $4.6 billion.
“The reaction (to Europe) is too soon, too fast and too much,” said Gopal Agarwal, equity head at Mirae Asset Global Investments (India) Pvt. Ltd.
He said that this is happening despite factors favouring the domestic economy such as the successful telecom spectrum auction and softening of crude prices, a plus for an energy hungry nation.
The FII pullout has exacerbated the fall of the rupee, which has lost some 7% this month. The local currency fell 1.5% to close at 47.70 a dollar against its Monday’s level of 46.98 a dollar, mirroring similar sharp falls in other Asian currencies. The dollar strengthened against all major currencies in the world except the Japanese yen.
“It’s a massive global risk aversion that has led dollar to strengthen against all currencies including rupee,” said Ananth Narayan, head of rates, foreign exchange and credit for South Asia at Standard Chartered Bank.
Overseas investors are betting that rupee will touch 48 a dollar level in a month’s time. The weakness also saw short-covering of dollars in the local markets.
The sudden drop of rupee though, could put the Reserve Bank of India (RBI) in a “precarious position”, said the head of treasury at a private sector bank.
Any attempt by RBI to buy rupees in a bid to bolster the currency could add to pressures in the domestic money market, where interest rates are expected to inch up as companies raise money for telecom licence fees and advance tax payments.