Global events, RBI inaction roil bourses

Global events, RBI inaction roil bourses

Mumbai: Indian stocks led the fall across the world on Friday, registering one of their worst days ever after the country’s central bank refrained from reducing its policy rate in a review and a confirmation that the UK is indeed in recession, with data showing that its economy shrunk in the three months ended September — the first such decline since 1991.

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Analysts and experts admitted that the fall was unexpected, but said that the trend could continue as foreign institutional investors (FIIs), who invested $7.9 billion (Rs39,500 crore today) in Indian equities in 2006 and $17.36 billion in 2007, scrambling to sell these at any price to meet redemption pressure back home.

With markets across the world falling after similar signs that indicated that the global economy is in the throes of a recession, US stock futures dove so steeply that they had to be frozen at several points. In New York, December Dow Jones futures were down 6.3%, Standard and Poor’s 500 futures were off 6.6% and Nasdaq 100 futures were down 6.8%, with all three contracts losing the maximum amount permissible before the start of trading in the US.

When trading began, the Dow fell sharply and was trading at 8,683.21 points, down 3.69%, at 8.30pm India time.

Earlier, Indian stocks suffered their worst day in history and saw some Rs3.5 trillion being wiped off their collective market capitalization.

The Bombay Stock Exchange’s (BSE) benchmark Sensex dropped 1,070.63 points, or 10.96%, to 8,701.07.

The fall was among the highest in percentage terms and the second highest in absolute terms after 21 January, when the index lost 1,408.35 points.

The broader Nifty index of the National Stock Exchange plunged 12.2%, it’s biggest fall in percentage terms too. The fall in the Nifty was accelerated by two component stocks, realtor Unitech Ltd, which plunged around 50% and wind energy player Suzlon Energy Ltd, which dropped around 40%.

Also See: All Fall Down (Graphic)

The trend for global markets was set early Friday, when markets in Asia opened weak.

On Thursday, former US Federal Reserve chairman Alan Greenspan confessed that he was in a state of “shocked disbelief".

On Friday, Sony Corp. and NEC Corp. slashed earnings estimates.

And UK data proved right Prime Minister Gordon Brown’s prediction of a recession.

On Friday, worried by falling oil prices, the Organization of the Petroleum Exporting Countries slashed production by 1.5 million barrels per day, but recessionary fears overwhelmed the anxiety and price rise this would have usually resulted in. Crude was trading down at around $63 to the barrel on the New York Mercantile Exchange at around 7pm India time.

RBI’s non-event

As global events took control of local equities, the mid-term review of the monetary policy by the Reserve Bank of India (RBI), which was expected to be the main focus for local markets on Friday, became a non-event.

The central bank eventually decided to do nothing after weeks of feverish interventions.

In the foreign exchange markets, the rupee crashed below the 50-mark against the US dollar for the first time in its history. In morning trades, the currency quoted at Rs50.15 against the greenback.

It ended trading at Rs49.95 to the dollar.

“India is facing collateral damage as its market is pushed lower by persistent and heavy selling by foreign institutional investors facing heavy redemptions in their home markets," said Deepak Lalwani, India director at London-based Astaire and Partners Ltd, a member of the London Stock Exchange. “Considering the severity of the current crisis, (we) expect the bottom to be around Sensex (at) 8,500."

Brokers and senior analysts in Mumbai were numbed by Friday’s events.

“We never anticipated this kind of a fall," said Rajat Rajgarhia, head of institutional research at Motilal Oswal Financial Services Ltd.

Dealers on institutional desks of brokerages said that many of their FII clients gave the biggest ever sell orders.

“It is now too late to sell India across the board," said Christopher Wood, chief strategist at foreign brokerage CLSA Asia Pacific Markets, in his Friday report. Funds that are in a mad scramble to raise money, out of fear and redemption pressures, however, failed to heed such advice.

FIIs sold stocks worth more than Rs1,430 crore in the cash market net of purchases, according to BSE data. Local institutions bought equities worth Rs514 crore, but failed to hold the market.

So far this year, foreign funds have net sold $12.2 billion worth of Indian securities. The Sensex is now down more than 57% this year.

RBI’s inaction on Friday didn’t come as a surprise to brokers and analysts. “Don’t be surprised if the RBI doesn’t do anything today," local brokerage India Infoline Ltd said in a Friday morning note to its clients before the central bank released its policy.

The note, however, added: “Expect some more easing in interest rates and CRR (cash reserve ratio, which determines the amount of money banks need to keep with the central bank) over the next weeks if inflation continues to moderate."

Slowing economic growth across the world will reduce demand for commodities and result in a fall in inflation, say analysts. Inflation in India, as measured by the rise in the Wholesale Price Index, is down from its peak of 12.91% for the week ended 2 August to 11.07% for the week ended 11 October.

Some analysts also see the slowdown spreading to Asia.

Economists at European financial services firm UBS AG expect “marked slowdown spreading to Asia", according to a report released by the firm on Wednesday.

And India’s railways minister Lalu Prasad told a general manager’s conference in New Delhi on Friday that there was a slump in the incremental loading of iron ore, cement and finished steel in the first 20 days of October.

“This may be due to the impact of the current economic crisis being experienced by various countries in the world," said Prasad. This is for the first time in five years that the growth rates in the three commodities are showing a downward trend at the same time. Among Asian markets, India’s were hit the hardest on Friday. Japan’s Nikkei index dropped 9.6%, while Korea’s Kospi index slumped 10.5%. The Hang Seng index in Hong Kong and Singapore’s Strait Times index dropped 8.3% each.

K.P. Narayana Kumar in New Delhi and Reuters contributed to this story.