Mumbai: India’s standing as a global safe haven, touted all through the second half of 2007 when the country’s stock markets boomed even as those in most Western countries went bust in the wake of the credit crisis in the US, took a beating Monday.
It was a beating that prompted Prime Minister Manmohan Singh to say that the “orderly growth of the capital market is a priority” for his government, and the government to issue a release asking investors not to panic.
On Monday, investors rushed to sell stocks, pulling down Sensex, the benchmark index of the Bombay Stock Exchange, by 1,408.35 points or 7.41%, its largest single-day fall in absolute terms.
Global investors’ cynicism on the effectiveness of the fiscal package announced by US President George W. Bush last week to avert recession in the world’s largest economy pushed the Sensex down 2,062 points before it recovered 600 points even as some domestic investors such as insurance behemoth Life Insurance Corp. of India bought stocks.
BIGGEST FALL (Graphic)
HOW THEY COMPARE (Graphic)
The fall lopped off around Rs6.64 trillion of the Bombay Stock Exchange’s market capitalization. The Sensex has lost 15.4% in six sessions since last Monday.
And the fall may continue for the time being as JPMorgan Securities (Asia Pacific) Ltd, an arm of JPMorgan Chase Bank NA, downgraded India in an Asia strategy report by chief equity strategist Adrian Mowat on Monday morning before trading started in Mumbai.
“We had a substantial correction across Asia,” said Sunil Garg, managing director and head of Asia (excluding Japan) equity research at JP Morgan Securities (Asia Pacific) Ltd in Hong Kong. “In the short term, Asian markets will take directional cues from the US market,” he added.
“The quantum of the fall on Monday points to the possibility of another smaller drop on Tuesday,” said Anita Gandhi, head of institutional business at Arihant Capital Markets Ltd, a Mumbai-based brokerage.
“Panic is evident in the market,” said Vallabh Bhansali, chairman of Enam Securities Ltd, a domestic brokerage, who terms the ongoing losses on the benchmark index as a technical correction.
All Asian markets were sharply down on Monday following a fall in US benchmark indices on Friday, which, according to analysts, indicated that the $140 billion relief package announced by Bush had fallen short of market expectations. Indices in India that had remained resilient all through 2007’s turmoil were the worst hit. The National Stock Exchange’s 50-stock Nifty index lost 8.7% or 496.50 points to close at 5,208.80. Singapore’s Strait Times lost more than 6%.
The fall in India was exacerbated mid-day Monday by “margin” calls. Nifty was trading about 3% lower at noon but fell more than 8% by 1pm as panicky brokers started unwinding “long” positions to meet their margin requirem-ents. According to Yogesh Radke, a derivatives analyst at Edelweiss Securities Ltd, a domestic brokerage, futures prices of some stocks were as mu-ch as 7-10% lower than their cash market eq-uivalents in intra-day trades.
The sharp difference in prices signals large unwinding of positions. Participants in the derivatives market take positions by depositing a margin with their brokers. Brokers, in turn, are allowed to take positions in the derivatives market, based on the amount deposited with the exchanges as margin. When prices drop sharply, a large portion of the margin money gets wiped away by the losses incurred on “long” positions which expect prices to rise, not fall. Exchanges then demand brokers to make up for the shortfall and brokers, in turn, ask their clients to cough up additional margins. When clients do not deposit additional margins, some brokers close their positions. And when brokers do not deposit additional margins, exchanges block their trading terminals.
The markets also came perilously close to being closed. At 2.27pm, the Nifty traded 9.8% lower than the previous day’s close and a drop of another 20 points would have led to the markets being closed for 30 minutes. According to rules specified by the market regulator, if the market falls by 10% before 1pm, it is shut for an hour. After 1pm, but before 2.30pm, a 10% fall leads to a 30 minute shutdown. Beyond 2.30pm, the market has to fall by 15% to warrant a shutdown.
Some market participants claim large operators managed to keep the Nifty above the 10% fall mark just prior to 2.30pm in order that markets remain open and they could unwind their positions.
The markets did fall by more than 10% on Monday, but that was after 2.30pm, and so there wasn’t a one-hour or 30 minute shutdown. There were two brief halts on the Bombay Stock Exchange after 2.30pm, but those were triggered by a technical glitch.
Brokers and analysts said proprietary trading desks of three large US banks, including Citi and Morgan Stanley in India, were big sellers on Monday. Proprietary trading refers to a bank’s trading in items such as stocks or bonds with its own money as opposed to its customers’ money, to make a profit for itself. However, an executive at a large US-based investment bank in India, who does not wish to be named, said: “It is an overall function of the market, not any select players trying to book profit.”
According to the BSE website, domestic institutions were net buyers to the tune of Rs3,399 crore on Monday, more than the net Rs3,296.73 crore worth of stocks sold by foreign institutional investors in cash market transactions.
FIIs have been net sellers of more than Rs1.36 trillion worth of Indian equities in the cash market since 1 January, according to BSE. Cumulative data provided by Sebi on the cash and derivatives market actions of large investor groups indicate $684.4 million net outflow from India this year, till 18 January.