Tumbling Sensex, rupee set regulators scrambling

Tumbling Sensex, rupee set regulators scrambling
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First Published: Tue, Oct 07 2008. 12 40 AM IST

Updated: Tue, Oct 07 2008. 12 40 AM IST
Mumbai: India’s bellwether stock index, the Sensex, hit a two-year low, sinking below the psychological 12,000 level on Monday in concert with global stock markets, as worries about the widening credit crisis put in the shade the US approval of a $700 billion (Rs33.25 trillion) financial industry rescue package.
Click here to see what Mint’s Nesil Staney has to say on the crisis
On a day the 30-stock Sensex fell about 5.8%, or 724.62 points, to end at 11,801.70, the lowest since September 2006, the country’s regulators stepped in to shore up the markets, but analysts don’t expect investor sentiment to receive a significant lift.
Also see BSE Sensex
The 10,000 level for the Sensex “is now very visible”, said the head of equity sales at a foreign brokerage, who did not wish to be identified.
The broader 50-stock Nifty index fell 5.66%, or 215.95 points, to 3,602.35.
Also see NSE Nifty
In an effort to woo foreign fund inflows, capital market regulator Securities and Exchange Board of India (Sebi) announced after the markets closed that it was lifting curbs on so-called participatory notes (PNs), which were clamped about a year ago.
PNs are offshore derivative instruments used by overseas investors and funds not registered in India for investing in Indian stocks.
Foreign institutional investors (FIIs) in India have taken out $9.3 billion from the domestic markets so far this year, after investing about $17.3 billion last year. The Sensex has declined some 41% this year, after delivering returns of 45% each during 2006 and 2007.
The steep fall in share prices and the exodus of foreign funds pulled the Indian rupee down by 73 paise on Monday to 47.82/83 against the dollar, its lowest level in more than five years.
In another effort to improve liquidity in the local banking system, the Reserve Bank of India (RBI) cut the cash reserve ratio (CRR), or the proportion of deposits that banks have to keep with the central bank, by 50 basis points to 8.50%. One basis point is one 100th of a percentage point.
The overnight money market rate, at which banks lend to each other, had shot up to about 17% as on Friday, indicating a liquidity crunch.
Analysts and investors are sceptical about the impact of Sebi’s move on market sentiment on Tuesday, or the broader investment strategy of FIIs.
The head of equities at a large foreign brokerage in India, which counts among the top five PN issuers, said regulators cannot make and scrap rules on foreign investment according to index levels. “It will not be an easy task to turn sentiments now,” the executive said, seeking anonymity because he is not authorized to speak with the media.
But bank stocks could see demand because of the RBI action. According to some analysts, bank stocks could also witness value buying, based on low inflation numbers last week.
All key Asian markets slumped in Monday’s trading. Stock indices in Japan, Hong Kong, China, Taiwan, South Korea and Singapore dropped more than 4% each. In Indonesia, the benchmark index slumped more than 10%.
The Dow Jones Industrial Average was down 4.9% to 9,815 at 8.45pm India time.
A series of moves by European governments and rhetoric to extend support to their banks only added to global investors’ worries about the contagion spreading through the European financial system.
Italy’s largest bank by assets, Unicredit Spa, said on Sunday that it would seek a $10 billion capital boost. BNP Paribas agreed to buy some units of Belgian-Dutch financial group Fortis NV, while Germany extended a $68 billion lifeline to Hypo Real Estate Holding AG.
Some analysts and fund managers in Europe now believe there will not be any massive bank failures in that region, considering the strong support by local governments.
“From an ideological standpoint, it is easier for the European governments to step in and save their banks,” said Alok Sama, president and founder of UK-based hedge fund manager Baer Capital Partners, which runs a fund in India as an FII.
With strong efforts by European governments and the $700 billion bailout package, the financial crisis would take a back seat in the next few weeks, analysts said. “There could also be coordinated efforts by central banks to cut interest rates, which could improve sentiments,” said Sama over the phone from London.
PTI contributed to this story.
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First Published: Tue, Oct 07 2008. 12 40 AM IST