Mumbai: Indian stocks suffered their biggest rout ever on Monday, wiping out a staggering 14.2 trillion of investors’ wealth and firmly placing the markets in bear territory as the government took drastic steps to curb new coronavirus infections.

It was a nerve-wracking day for investors as benchmark indices refused to respond to regulatory signals designed to halt the market plunge.

When the market bells rang at 9.15am in the morning, signalling the start of trading, the benchmark Sensex opened 2,307 points lower at 27,608.80, signalling a clear intent to seek fresh bottoms.

By 10am, it had hit the 10% lower circuit, and the 45-minute trading halt that followed failed to stanch the plunge, as the selling frenzy continued after resumption of trading.

The Sensex eventually closed 3,934.72 points lower, tumbling 13.15% to 25,981.24, while the Nifty plunged 13% to 7,610.25.

The central government and states imposed an almost nationwide lockdown over the weekend to stem community contagion as the number of coronavirus infections in India surged to nearly 500.

The lockdown is expected to cripple economic activity and deal a blow to consumer confidence in an economy that is already set to grow the slowest in more than a decade. The lockdown is aimed at slowing the spread of the virus and prevent hospitals from being overwhelmed by Covid-19 patients.

Indian markets underperformed Asian and European peers, indicating increased uncertainty regarding the spread of the virus in India, according to Vinod Nair, head of research at Geojit Financial Services. “Further measures and lockdowns are expected after manufacturing companies indicated that they would shut down their facilities, which would have an overall impact on business activity and market confidence," he said.

Equities in China, Hong Kong, Australia and Korea fell 3-5% on Monday.

The new curbs on short selling had little impact as the rules were applicable for both long and short positions, which makes it difficult for new long positions while short positions caused more price damage due to lack of liquidity.

On Friday, the Securities and Exchange Board of India (Sebi) curbed short selling where short positions are not backed by underlying stocks. However, in India, the majority of FII shorts are backed by stocks. Small traders, on the other hand, are allowed naked long and short positions in index derivatives up to 500 crore.

“It seemed like a delivery sales led fall in markets, as buyers are not certain when markets may turn around, so they are taking time to accumulate. Markets should have bottomed some time back as the fall from record highs is quite sharp now, but bottom formation may take longer on concerns over uncertainty on earnings revival due to impact of Covid-19. With risk-on sentiments evaporating, valuation concepts will have to be relooked. There could be a few bounces over the next few days but a sustainable bottom does not seem near," said Deepak Jasani, head retail research, HDFC Securities.

Volatility index, or VIX, rose 6.64% to 71.56 on Monday, indicating that there could be further corrections in markets.

VIX has gained 517% year to date and 210% in March alone.

Foreign institutional investors (FIIs) continued their selling spree. FIIs have sold $6.23 billion in equities and $6.33 billion in debt in March alone.

The Covid-19 outbreak in India is also weighing on the rupee, and if it continues, equity portfolio outflows could accelerate, acting as a drag on the currency, analysts said.

On Monday, the rupee breached 76 per dollar for the first time, ending trading at 76.29, down 1.44%.

The yield on the 10-year government bond closed at 6.38%, up 12 basis points.

Meanwhile, gold prices have declined nearly 10% in March, suggesting investors are rushing to hoard cash.

BofA Securities analysts expect Reserve Bank of India to use its recent forex reserves accretion of $57.7 billion to fend off any speculative attack on the Indian currency.

“Looking ahead, we think that the RBI will be comfortable with depreciation that is broadly in line with a stronger dollar. Second, we estimate that it can freely sell $30 billion, as that will still maintain import cover at 11.9 month one-year forward at $45/bbl on oil," it said on 23 March.

The Reserve Bank of India got fewer bids for dollars that were offered via the swap line, even as the scramble for dollar continued globally.

RBI accepted bids worth only $650 million under its second sell-buy dollar swap auction, which aimed to inject $2 billion into the markets. The central bank got bids worth $1.53 billion in the auction compared to $4.67 billion in an earlier one, it said in a statement Monday.

Traders said that banks placed bids for higher premium which RBI wasn’t willing to accept. In the auction, participants are required to place bids in terms of premium they wish to receive from RBI for the tenor of the swaps. Successful bidders would have placed their bids below or at the cutoff premium. The cutoff was set at a premium of 196 paise.

The swap came at a time when the rupee slumped to a record low of 76.1563 against the dollar on Monday. Foreign institutional investors have already taken out over $12 billion from the both the equity and bonds markets.

Gopika Gopakumar and Jayshree Upadhaya contributed to the story.

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