BSE’s benchmark Sensex fell 418.38 points, or 1.13%, to 36,699.84, while the National Stock Exchange’s 50-share Nifty index declined 1.23% to 10,862.60.
On Monday, India scrapped Article 370 of the Constitution that grants special status to Jammu and Kashmir, a move that may intensify the unrest in the border state.
Mounting trade tensions between the US and China added to the unease of investors.
The aggressive sell-off in stocks started after the Union budget was presented on 5 July. Since then, the Sensex has slumped 8% as foreign portfolio investors (FPIs) started dumping shares after the budget raised a tax surcharge on the “super rich" that also applies to FPIs.
The rupee on Monday weakened the most since September 2013. The rupee ended at 70.74 a dollar, down 1.6%, its steepest fall since 3 September 2013, from its Friday’s close of 69.60.
The local currency opened at 70.06 and touched a low of 70.72 a dollar. So far this year, it is down 1.3%.
Multiple issues are weighing on Indian stocks, said Vinod Nair, head of research at Geojit Financial Services Ltd. “Concerns of a political crisis developing in Jammu and Kashmir and no further cues on exclusion of surcharge to FPIs added to the volatility in the market. Selling was broad-based, despite late recovery witnessed in auto and banks while IT stocks held on to the gains due to a weakening rupee," said Nair.
The NSE’s India VIX index, which tracks investors’ perceptions of volatility for at least a month ahead, surged 8.92% on Monday to touch 16.54, the highest in two-and-a-half months. The index at elevated levels indicates investors expect a major correction at least over the next month.
The Narendra Modi government’s scrapping of Article 370 may have far-reaching repercussions on the restive state of Jammu and Kashmir, as the abrogation suspends the clause that allowed all laws to be first be ratified by the state assembly, which currently stands dissolved.
Meanwhile, overseas markets were also under pressure on Monday. Stocks in Japan, China, Hong Kong and Korea fell 1-2.8% after US President Donald Trump on Thursday slapped a 10% tariff on China’s remaining $300 billion of exports to the US.
The Chinese currency fell past 7 per dollar for the first time since 2008 amid speculation that Beijing was letting its currency weaken to counter US tariffs.
In a currency war, politicians nudge their central banks to cut borrowing costs so as to push down the exchange rate. Trump wants more rate reductions from the US Federal Reserve and a weaker dollar.
China’s decision to weaken its currency amid the escalating trade war will put Asian central banks on the defensive as they gauge how much monetary policy easing their economies can withstand. That pulled down Asian currencies from South Korea to Thailand and worsened a sell-off in stocks.
“First, the Fed became the second major central bank (after ECB last week) to disappoint markets, as it delivered a less than dovish cut of 25bps (basis points). To add to the woes, Trump announced another round of tariffs on the last remaining tranche of Chinese imports. China has already warned of retaliation and now all eyes will be on how China reciprocates, and everything else will likely take a backseat for now, in our view," said Nomura Research in a note.
The Reserve Bank of India is widely expected to cut interest rates in its monetary policy review on Wednesday.
Analysts at Ambit Capital Pvt. Ltd said that with growth in wages and corporate profit at multi-year lows, consumption is likely to stay weak in FY20/21. “Even as we are yet to articulate our FY21 GDP forecast, we highlight that an economic turnaround appears distant at this point. In fact, the rising credit stress emanating from the retail segment is a deeply worrying trend that has emerged over the last fortnight. In view of all these headwinds, we urge clients to adopt a strongly defensive strategy with respect to India," it said in a note on 2 August.
(Bloomberg contributed to the story)