Sensex loses 551 points on P-notes concerns, China sell-off

Indian stocks fell nearly 2% on Monday—the biggest drop in nearly eight weeks—reacting to poor company earnings, a global sell-off across assets, and fears of greater scrutiny of investors who choose the participatory note (P-note) route.

The benchmark BSE Sensex closed at 27,561.38 points, down 550.93 points, or 1.96%, while the National Stock Exchange’s 50-share Nifty ended at 8,361 points, down 160.55 points, or 1.88%. It was the Sensex’s biggest fall since 2 June, and the Nifty’s biggest decline since 11 June.

The downside in domestic equities reflected the weakness across Asian markets. Chinese benchmark indices saw the steepest fall since February 2007, according to Bloomberg, with the Shanghai Composite closing 8.5% lower on Monday.

On Friday, China’s Purchasing Managers’ Index fell to a 15-month low, disappointing markets and leading to a further sell-off across commodity and equity markets. The Thomson Reuters CRB index, an index of different commodities, fell to its lowest in six years on Monday.

“Market was down because of global market pressure as well as concerns over the special investigation team (SIT) recommendations over P-notes,” said Nirmal Jain, chairman of IIFL Holdings Ltd.

Disinvestment secretary Aradhana Johri said the SIT report unveiled on Friday had affected the sentiment of foreign portfolio investors. The SIT called for regulation of P-notes and other offshore derivative instruments (ODIs), after concerns were raised that some of the money coming into the Indian stock markets through P-notes could be unaccounted wealth rerouted into India as foreign investment.

Clarifications by finance minister Arun Jaitley during the day helped allay concerns. “No wrong cue should be taken from today’s volatility. It will settle down after consultations with stakeholders start,” Johri added.

Metal stocks were among the top losers, as industrial metals tumbled. London copper slipped on Monday to trade near its weakest in six years, as concerns over demand in top-user China was compounded by a seasonal slowdown in manufacturing activity over the summer and ample supply, a Reuters report said.

Tata Steel Ltd was the top Sensex loser, as it closed 5.17% lower.

Among other metal firms, shares of Steel Authority of India Ltd fell 2.58%, NMDC Ltd 2.77%, Vedanta Ltd 3.17% and Hindalco Industries Ltd 4.4%.

Shares of Tata Motors Ltd hit a 16-month low, losing over 13% in five of the last six trading sessions on the back of higher volumes. The stock touched a low of ₹ 373.05, a level last seen on 21 March 2014, before closing 3.46% lower at ₹ 377.60.

All sectoral indices closed in the red. The BSE capital goods was the top sectoral loser, down 2.80%, followed by the BSE Bankex, which was down 2.28%.

Apart from weakness across global markets, poor earnings also hit sentiment.

The first set of June quarter earnings of Indian companies showed no sign of an immediate turnaround, as sales growth declined for the third straight quarter amid weak demand and subdued industrial activity in Asia’s third largest economy.

Aggregate net sales fell 2.78% from a year ago, according to a Mint analysis of 275 BSE-listed companies. Net profit rose 9.12%, but was still slower than the profit growth in the March quarter.

“Investors have given a long rope to India’s earnings recovery, but we wonder if that will remain the case given earnings downgrades and misses in certain expensive stocks of late. The ongoing results season looks no different from the past few. Valuations remain nonchalantly high,” said Kotak Institutional Equities in a report on Monday.

Meanwhile, finance minister Jaitley said the government will consider the impact on the investment climate while considering the report of the SIT constituted on black money.

“The government will apply its mind in due course, keeping in mind the investment environment of the country as also the objective behind the SIT recommendations and then take a final view on the matter,” he said, allaying fears of any immediate action by the government.

The government is also expected to seek suggestions from stock market regulator Securities and Exchange Board of India and the Reserve Bank of India (RBI) as well as market participants before taking a final view on these recommendations.

The Indian rupee also tumbled to a six-week low following the meltdown in equity markets. It fell as much as 0.26% to 64.2075 per US dollar, its lowest level since 16 June. It later closed at 64.17, down 0.2% from previous close.

“...we do not expect the RBI to offer anything more than a token resistance at ₹ 64/USD given that August is seasonally weak,” said Bank of America-Merrill Lynch (BoFA-ML) in a report on Monday.

“With our equity strategists expecting BSE Sensex stocks to post 0% profit growth, it is natural that portfolio flows will stall. At the same time, we expect Gov Rajan to sell US$15bn to defend Rs65/USD levels,” BoFA-ML added.

The brokerage house highlighted the progress of the monsoons and the forthcoming US Federal Reserve (Fed) meeting as key event risks for the week. The US Fed will meet on Wednesday.

“While our US economists expect a September rate hike, they think that the FOMC (Federal Open Market Committee) statement would emphasize data dependence and eschew any overt signals about the timing of lift off,” said the report.

Asit Ranjan Mishra in New Delhi contributed to this story.