Mumbai: Indian shares posted their biggest drop in more than two months on Thursday, joining a slump in emerging and regional equity markets, after minutes from the US Federal Open Market Committee’s (FOMC’s) October meeting hinted at a tapering of monetary stimulus measures in the world’s biggest economy in the coming months.

Analysts say the near-term outlook for Indian shares is hazy, given the market’s dependence on foreign fund inflows that have been spurred by the Federal Reserve’s $85-billion-a-month bond buying programme. The worry is that foreign funds may desert emerging markets like India once the Fed begins winding down stimulus measures.

“Market hates uncertainty as it causes unwanted choppiness across the board. And, from the time the tapering issue came in picture, we have been seeing these erratic reactions every now and then," said Jayant Manglik, president of retail distribution at Religare Securities Ltd.

“Besides, it also shows that global markets, including ours, are more concerned over the liquidity scenario, instead of focusing on improving fundamentals," he said.

The Sensex is now 1,092.48 points away from its lifetime high of 21,321.53 points recorded on 3 December.

Federal Reserve officials felt they could decide to start scaling back the asset-purchase programme at one of its next few meetings, provided this was warranted by economic growth, minutes of the 29-30 October policy meeting released on Wednesday, showed.

All sectoral indices slumped on Thursday with the BSE Bankex leading the losses with a 2.5% decline. BSE Capital Goods Index and BSE Realty Index followed with a 2.4% and 2.3% decline, respectively. All 30 Sensex stocks also closed lower. Cigarette maker ITC Ltd and mortgage lender Housing Development Finance Corp. Ltd contributed the most to the Sensex’s loss as they fell 2.6% and 3.6%, respectively.

The rupee also dropped the most in more than a week after the release of the minutes from the FOMC meeting. The Indian currency fell 0.6% to 62.94 a dollar, the biggest drop since 12 November. The dollar index, which tracks the dollar’s movement against six major counterparts, rose 0.2% following a 0.5% gain on Wednesday.

According to provisional data from the National Stock Exchange, foreign institutional investors (FIIs) on Thursday turned sellers of Indian equities for the first time since 1 October and they sold 59.8 crore of Indian shares net of buying.

Overseas investors have bought $17.2 billion of the local shares this year, the highest after Japan, among 10 Asian markets.

“If you have been a big beneficiary of quantitative easing, there will be pain when the tapering happens, and that is what people are afraid of," said U.R. Bhat, managing director of Dalton Capital Advisors India Pvt. Ltd. “Mere talk of tapering is enough for the market to fall."

Apart from the taper fears, a slowdown in China’s manufacturing activity also spooked investors. The MSCI’s emerging markets index fell 1.3%, while Indonesia’s Jakarta Composite Index and Russia’s RTS Index shed 1.4% and 0.6%, respectively. China’s Shanghai Composite Index closed almost unchanged. Brazil’s Bovespa shed 2.4% in the previous session.

“The Indian market remains vulnerable," Maarten-Jan Bakkum, emerging market strategist at ING Investment Management International, said in an e-mail from The Hague, in the Netherlands.

“There are some signs of economic growth bottoming out and the current account deficit is narrowing. But the current account gap is still large and both the fiscal position and inflation are not under control," Bakkum said.

Apart from the fear of the easy money flowing out, India is beset by domestic economic problems including slower growth and persistent inflation. Growth slowed to 5% in the year to 31 March, the least in 10 years.

The economy will likely expand 5.5% in fiscal 2015 and 6.5% in the following year, Goldman Sachs estimated in its 2014 India Economic Outlook.

“We are seeing a pick-up in growth due to improvement in investment demand and external growth environment," Tushar Poddar, chief India economist at Goldman Sachs, said in a conference call on Thursday.

In a report released on Thursday, Goldman Sachs, however, pointed out that India and Indonesia came under significant pressure in the summer’s “taper tantrum" and have tried to mitigate the damage, with central banks increasing effective policy rates, utilizing reserves and encouraging capital inflows. That was a reference to the panic that followed hints by the Federal Reserve that it may soon start tapering stimulus measures.

“The near-term impact has been deceleration in growth and we expect both countries to underperform consensus expectations in 2014," Goldman Sachs analysts wrote in the note.

Fitch Ratings said on Wednesday that the current account deficit of Asia’s third-largest economy is narrowing and is likely to decline to 3.1% of gross domestic product (GDP) in fiscal year 2014 from 4.8% in fiscal year 2013, but this drop will not be enough to shield India from further pressures related to the eventual start of Fed tapering.

There have been mixed voices on how investors view the market in the run-up to the general elections next year. Some investors have been pinning their hopes on Narendra Modi, the Bharatiya Janata Party’s prime ministerial candidate, and are viewing the likelihood that his party forms the next government as a positive factor; others say the outcome is fairly uncertain.

Political uncertainty ahead of the elections is a factor that is likely to continue weighing on the market, Bakkum said, adding that in the context of global emerging markets, ING is currently neutral on India.

“Emerging markets remain highly sensitive to the US tapering discussion," Bakkum said.

“Our view is that the Fed will start tapering by March. This means that the coming months will likely be nervous where tapering expectations are concerned," he said, adding that the most vulnerable emerging markets are the ones with the highest external financing requirements in combination with large macro imbalances and lack of reforms.

The Sensex has gained 4.1% this year and is trading at 13.2 times projected 12-month profits, compared with the MSCI Emerging Markets Index’s 10.5 times.

Bloomberg and Reuters contributed to this story.

Close