Mumbai: Indian stocks recovered around 500 points in late trading Tuesday to close flat as investor focus shifted from the dramatic developments on Wall Street to what the US Federal Reserve might do Tuesday night.
Well, after Indian markets closed, the Reserve Bank of India also swung into action to contain “excess volatility” in a series of market measures, setting the stage for a significant response from the stock markets on Wednesday when they open for trading in Mumbai.
India’s most tracked stock index, the Bombay Stock Exchange’s Sensex, closed on Tuesday’s trade at 13,518.8, almost unchanged from Monday’s 13,531.27, ending a five-day losing streak when it lost about 10% from 14,500 levels to 13,500 levels.
At one point during Tuesday, the Sensex was down as much as 480 points.
Looking for cues: Former US Fed chairman Alan Greenspan’s interview being telecast on a screen on the BSE building in Mumbai on Monday. Punit Paranjpe/Reuters
According to fund managers and large brokerages, many institutional investors are betting on a rate cut from the US Fed, which they believe could improve liquidity in emerging markets, including India, and trigger a short rally in stocks.
“A rate cut by the Fed could have eased the ongoing withdrawal of liquidity from Asia,” said Clive McDonnell, Hong Kong-based regional strategist at BNP Paribas Securities Asia, in his client note on Tuesday. On the other hand, “(the) outlook for Asian equity markets in the absence of a rate cut by the Fed looks very bearish in the coming weeks.”
While the credit crisis is seen as far from over, some investors say that stronger financial franchises emerging to buy weaker ones, as in the case of Merrill Lynch and Co. Inc., which would be taken over by Bank of America Corp., is a positive sign.
However, some foreign institutional investors, or FIIs, believe that there could still be a flight of capital to quality, after the added bearishness on Monday, which would give a negative outlook for riskier assets, including Asian equities, in the short term.
“More of a wipe-out is quite possible,” said Christopher Wood, Hong Kong-based strategist for regional brokerage CLSA Asia-Pacific Markets.
As expected, some of the key Asian markets, such as Japan, China, Hong Kong and South Korea, which were closed on Monday for public holidays, saw a slump on Tuesday. The Hang Seng lost more than 1,000 points, or about 5%, while Japan’s benchmark index Nikkei also dropped about 5%, and South Korea’s index Kospi lost more than 6%.
Indian markets had outperformed most other key Asian markets since mid-July. This, however, also holds higher downside risks for the Indian markets, say some.
“We believe India is the market most exposed in the short-term,” said McDonnell of BNP, who recommended investors “to sell India”.
Some investors, however, believe that many Indian stocks are already in an oversold position as the sharp drop in oil prices have not been factored into local stock valuations. “Amid all the chaos on Monday, the steep drop in oil is one story that many investors missed,” said the Mumbai office head of a US-based hedge fund.
A further drop in crude prices, as flagged by many institutional investors, will be a huge positive for Indian markets as it will soften inflation and bring down interest rates. “If oil prices drop to $75 (Rs3,500) a barrel, it will be a big upside boost for Indian stocks,” BNP’s McDonnell said in a telephone interview from Hong Kong.
Many large investors continue to bet on a further decline in oil prices. “It increasingly looks like oil should correct all the way back to $60,” said CLSA’s Wood.
Apart from the continuing drop in the price of oil and other commodities, another attraction for FIIs to allocate capital to Indian equities is the steep slide in the value of the local currency.
On Tuesday, the rupee’s value against the US dollar almost fell to 47 around noon before ending Tuesday at a near 27-month low of 46.93, cheaper by 87 paise from its last close.