Mumbai: Global weakness dragged Indian markets, with the benchmark indices slipping nearly 2% on Friday. A sell-off in the global equity markets amid mounting concern over global economic growth in the coming year made investors jittery worldwide.

The Sensex fell 689.60 points, or 1.89%, to close at 35,742.07, while the broader Nifty index shed 197.70 points or 1.81%, to 10,754. The rupee closed at 70.18 to a dollar, down 0.68% from its previous close of 69.70. After a four-day rally, the currency opened at 69.94 and touched a low of 70.32 a dollar.

“Concerns on global economy growth and threat of partial US government shutdown created headwinds to the domestic market. The rupee gave up some gains due to volatility in bond yields. However, a fall in oil prices is expected to provide strength to the rupee in the near term," said Vinod Nair, head of research at Geojit Financial Services Ltd. “Investors are using this opportunity to book profit after the recent rally; the market direction will turn positive as domestic economic indicators remain healthy."

On Wednesday, US Federal Reserve chairman Jerome Powell said there was “significant uncertainty" about future interest rate hikes, pointing to weaknesses in financial markets and a moderating growth outlook.

Global markets were also worried about the rising threat of a US government shutdown. US President Donald Trump insisted on funding a wall or other barrier along the southern US border as tensions over a possible partial government shutdown intensified in the wake of the president’s refusal to sign a stopgap spending bill. US-China tensions and the prospect of a partial US government shutdown have also fuelled investor concern that the buoyant economic growth story of 2018 may not have legs to go much further.

In Asia, markets in Japan and China fell around 1% on Friday.

Domestically, investors were also cautious on expectations that the ruling Bharatiya Janata Party may announce more populist measures to woo voters ahead of general elections next year, after losing assembly elections in Madhya Pradesh, Rajasthan and Chhattisgarh. Eight state governments have waived farm loans worth 1.9 trillion since April last year. Since Monday, 59,000 crore of waivers have been promised to farmers in Madhya Pradesh, Rajasthan and Chhattisgarh.

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“States, who have announced farm loan waivers recently, can limit the adverse impact on their states’ fiscal health. In case the entire farm loan waiver is accounted for in the current fiscal year, it may lead to a sharp increase in debt/deficit and/or a sharp reduction in capital expenditure, which will adversely impact the productive capacity/growth potential of the states in the medium term," said India Ratings & Research in a 19 December note.

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The government exceeded its budgeted annual deficit in October, and any announcement like farm loan waiver or tax cuts may lead to fiscal slippage, analysts say. Fiscal deficit—the gap between the government’s revenue and expenditure—stood at 6.48 trillion at the end of October. That’s 103.9% of the budgeted estimate of 6.24 trillion for 2018-19. The gap had stood at 96.1% in October last year.

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ICICI Securities expects growth to ease further as tightening financial conditions and cautiousness ahead of general elections weigh on business sentiment. “While growth in first half of FY19 averaged 7.65%, we expect second half of FY19 growth to come in below 7%, taking the full-year average to 7.2%. In FY20, real GDP growth is likely to pick up to 7.4%," it said in a 19 December note.

Bloomberg contributed to the story.

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