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Patel and polls may make it Black Tuesday for markets

The Sensex lost 713 points on Monday, while rupee ended at 71.34, down 0.74% from its Friday’s close. The 10-year government bond yield closed at 7.587% from its previous close of 7.464%. Graphic: MintPremium
The Sensex lost 713 points on Monday, while rupee ended at 71.34, down 0.74% from its Friday’s close. The 10-year government bond yield closed at 7.587% from its previous close of 7.464%. Graphic: Mint

Monday's carnage, where the Sensex and Nifty slumped 2.0% and 1.92%, respectively, is widely expected to continue today on cue from RBI governor Urjit Patel's resignation and assembly election results

Mumbai: Markets braced for a deep dive on Tuesday after crashing on Monday over the abrupt resignation of Reserve Bank governor Urjit Patel, coupled with jitters in anticipation of assembly election results from five states. The Dow Jones index closed 0.31% higher, while futures on the Nifty index in Singapore fell as much as 1.7%, signalling a lower opening for the benchmark indices Sensex and Nifty today.

Stocks, bonds and the rupee fell on Monday after exit poll results of assembly elections in five states projected a likely setback for the Bharatiya Janata Party (BJP).

The Sensex closed at 34,959.72 points, down 713.53 points or 2%, while the Nifty closed at 10,488.45, down 205.25 points or 1.92%. Investors took cues from the Asian markets as well, where the Nikkei fell 2.12%, Hang Seng 1.19%, and the Shanghai Composite 0.82%. These markets fell after data showed the trade dispute with the US is beginning to hurt the Chinese economy.

Exit polls released after market hours on Friday projected the BJP losing power in Rajasthan and facing a tight finish in Madhya Pradesh and Chhattisgarh— three states where it is in power. Results for Rajasthan, Telangana, Madhya Pradesh, Mizoram and Chhattisgarh will be announced today, and are widely seen as an indication of the public mood ahead of general elections next year.

Monday’s shock resignation of Patel, following a prolonged stand-off between the central bank and the government, has added to the uncertainty. The centre has been seeking to reduce curbs on lending, and gain access to RBI reserves.

“On account of personal reasons, I have decided to step down from my current position effective immediately. It has been my privilege and honour to serve in the Reserve Bank of India in various capacities over the years," Patel said in his brief resignation letter.

Vinod Karki, vice president (strategy) at ICICI Securities Ltd, said: “It is clearly a negative surprise for the markets and there could be a sharp reaction tomorrow. It also gives the wrong signals to global investors. Anyway, state election results are expected to keep markets very uncertain tomorrow. Broadly, I feel markets may test the bottoms that we hit this year. Hopefully, that support level should stand."

Markets have been volatile this year as crude oil prices soared and the rupee fell, further delaying a much-awaited corporate earnings revival. The lowest levels for the Sensex and Nifty this year were at 32,483.83 and 9,951.9 on 23 March.

Ajay Bodke, CEO and chief portfolio manager (PMS) at broking firm Prabhudas Lilladher, said Patel’s resignation may cause a temporary flutter in the markets already on tenterhooks over assembly election results. “Global headwinds like escalating trade war between the US and China, Britain’s parliamentary vote on Brexit and fears of a slowdown in global economic growth in 2019 have already led to a sharp spike in risk aversion for risk assets like equities," said Bodke.

The rupee and bonds were under pressure, partly due to a wider current account deficit and the surge in crude oil prices. India’s current account deficit widened to $19.1 billion or 2.9% of gross domestic product (GDP) in July-September, from $15.9 billion or 2.4% of GDP in the April-June quarter and 1.1% of GDP in the year-ago period. That gap was lower than a median $19.9 billion deficit predicted in a Bloomberg survey of 12 economists.

The rupee on Monday ended at 71.34 a dollar, down 0.74% from its Friday’s close of 70.81. It opened at 71.31 a dollar and touched a high and a low of 71.24 and 71.45 respectively. The 10-year government bond yield closed at 7.587% from its previous close of 7.464%.

Bond yields and prices move in opposite directions.

“Markets are edgy ahead of the election result, especially as the exit polls presented a confused picture in Madhya Pradesh and Chhattisgarh. This, in conjunction with surprise breakthrough in Opec production cut, has lent renewed support to Brent, weighing further on INR," said Edelweiss Securities in a 7 December note.

“Additionally, the fate of Brexit parliamentary vote on 11 December would add another layer of uncertainty in FX space globally. While the outcome of state elections would decide near-term rupee direction, we remain watchful of unwinding of global events, including that of the US FOMC (Federal Open Market Committee) December policy, which could see Fed further reinstating data dependency-led reaction function ahead," the Edelweiss report added.

Ravindra Sonavane contributed to this story

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