One enduring puzzle since the end of May was why equity markets were stable despite the general sense of gloom about the state of the Indian economy. Most of the panic was restricted to the bond market. Since 22 May, when US Fed chief Ben Bernanke first hinted at the end of quantitative easing, net sales of Indian bonds by foreign investors were four times larger than net sales of Indian shares. So four dollars of bonds were dumped for every dollar of equity sold.
The massive selling that sent share markets reeling on Friday is perhaps the first indication that equity investors are now getting into a state of panic. It was a bad day for most regional markets, but India was hit particularly badly. Further, the rupee also tanked, volatility spiked, and bond prices plunged.
It is no surprise that gold—a safe haven that offers a hedge against a weak rupee—was the only asset to rally.