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Business News/ Market / Stock-market-news/  Sensex, Nifty fall 2% on US Federal Reserve rate hike fears
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Sensex, Nifty fall 2% on US Federal Reserve rate hike fears

Analysts say India will remain among the most-favoured global markets for investors in the long term

In intra-day trade, both the indices saw their sharpest fall since 6 January as the Sensex fell as much as 2.2%, or 649.19 points, to 28,799.76, while the Nifty fell as much as 2.21%, or 197.30 points, to 8740.40 points. Photo: Hemant Mishra/Mint (Hemant Mishra/Mint)Premium
In intra-day trade, both the indices saw their sharpest fall since 6 January as the Sensex fell as much as 2.2%, or 649.19 points, to 28,799.76, while the Nifty fell as much as 2.21%, or 197.30 points, to 8740.40 points. Photo: Hemant Mishra/Mint
(Hemant Mishra/Mint)

Mumbai: Indian shares fell the most in two months on Monday, led lower by global markets, as investors bet that the US Federal Reserve may raise interest rates sooner than expected, sapping demand for riskier emerging-markets assets.

Most analysts are, however, confident that India will remain among the most-favoured global markets for investors.

“From a long-term perspective, India is a good bet, even if the US hikes interest rates. That might just have an adverse impact in the short term," said Dipen Shah, head of private client group research at Kotak Securities Ltd.

“The only thing is that the government should be able to implement various fiscal reforms, that can cushion the impact of any probable US interest rate hike," added Shah.

The 30-share BSE Sensex fell 604.17 points, or 2.05%, to 28,844.78, while the National Stock Exchange’s broader Nifty index declined 2.03% to 8,756.75 points.

In intra-day trading, both the indices saw their sharpest fall since 6 January. The Sensex fell as much as 2.2% to 28,799.76, while the Nifty fell as much as 2.21% to 8,740.40 points

US employment data released on Friday showed that the economy added 295,000 jobs in February and the unemployment rate fell to a six-and-a-half year low of 5.5%, spurring speculation that the US Fed may hint at an early rate hike as part of March monetary policy meeting.

In response, equities fell worldwide.

While Indian equity indices fell the most, most Asian markets closed lower. Japan’s Nikkei 225 fell 0.95%, while Korea’s Kospi fell 1% and Indonesia’s Jakarta Stock Exchange Composite Index fell 1.27%. Chinese equity markets, however, gained, led by financial stocks.

While the gains in the Indian market since last year and the rich valuations of stocks may leave the local markets vulnerable to some selling pressure from foreign investors, most analysts say India remains one of the best relative bets across major global markets.

This, they say, will prevent a repeat of the summer of 2013, when the first hint of the US Federal Reserve tapering its quantitative easing programme led to a sharp decline in Indian equities and weakening of the local currency. Between 22 May and 21 June in 2013, the Sensex fell 6.4% and the rupee tumbled 6.4%. The rupee weakened to a record low of 68.85 a dollar on 28 August 2013.

Since then, the view of India has changed dramatically with the current account deficit narrowing, foreign exchange reserves increasing and growth seen picking up.

“One Asian story Greed & Fear continues to believe will prove to be remarkably immune to a US monetary tightening scare is India. The simple point to make on the India budget is that it is bullish since it confirms the government’s strategic focus on seeking to generate investment-driven growth," Christopher Wood, managing director of brokerage house CLSA, wrote in a 5 March Greed & Fear newsletter.

India is the best bet among world economies, said Jim Walker, founder and chief economist of Hong-Kong based Asianomics, a research and consulting firm, in an interview on 24 February.

Since the start of the year, foreign investors have bought a net of $4.97 billion in stocks and $6 billion in debt. Since the beginning of this year, the Sensex has gained 7.05%.

“The underlying fear is that the US may hike rates, and eventually we will see a stronger dollar. The sentiment is not very good, which is why there was a downfall in the world markets," said Vaibhav Sanghavi, managing director of Ambit Investment Advisors Pvt. Ltd.

In a note on Monday, Credit Suisse Group AG said it expects the Fed could raise rates from as early as June and hint at this at the March meeting.

“...we highlight that historically corrections in MSCI Asia ex-Japan ranged from 14% (2013 Fed taper episode) to 25% (1994 episode)," said Credit Suisse, adding that Asian markets may see a smaller correction this time.

The currency markets also felt the pinch from the stronger-than-expected US data.

The Indian rupee fell 0.6% to a two-month low and closed at 62.54, against the dollar compared with its previous close of 61.17.

The currency hit an intraday low of 62.74 per dollar but recovered as exporters were seen selling dollars at lower levels. On Friday, the dollar index hit an eleven-and-a-half year high of 97.80 levels.

The persistent strength in the dollar has been one reason why a number of analysts have been calling for a delay in rate hikes from the US Fed.

The Indian rupee, however, could be in for some more pressure, felt some analysts.

“There is some fundamental shift in rupee level after the strong US data. We don’t expect the rupee to strengthen much from these levels. It should trade largely between 62-64 a dollar in the next three-to-six months," said Abhishek Goenka, chief executive of India Forex Advisors Pvt. Ltd. Goenka added that the budget had been a dampener for the rupee.

“The RBI (Reserve Bank of India) is also talking about weak rupee and as such market participants don’t see much merit in rupee’s strength. On top of that, the US job data has put additional pressure on the local currency," said Goenka.

On Monday, the BSE Bankex—a grouping of bank stocks—was the top loser among sectoral indices. The index tumbled 3%, followed by the power and capital goods indices which were down 2.9% and 2.7%, respectively. The BSE realty and metal indices were down 2.6% and 2.4%, respectively. The BSE IT and Teck indices were down 2% each. BSE Oil and Gas index fell 1.7%, while the auto index fell 1.1%. The BSE Healthcare index was the top sectoral gainer, up 0.3%.

Among individual stocks, Sesa Sterlite Ltd fell 5.21% to 199.15, while Hindalco Industries Ltd fell 4.7% to 140.95. Among the gainers, Hindustan Unilever Ltd rose 3.8% to 974.3 and Dr. Reddy’s Laboratories Ltd rose 0.68% to 3,462.85.

Ashwin Ramarathinam and Ravindra Sonavane contributed to this story.

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Published: 09 Mar 2015, 10:03 AM IST
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