 "Black Monday: China shock clobbers markets")
The sell-off was so severe and unprecedented that nine out of 10 stocks ended with losses, which led to an erosion of Rs 7 lakh crore worth of investor wealth — the most in the country’s stock market history. The amount is about five per cent of India’s gross domestic product.
Most Asian markets ended with more than five per cent losses, European equities opening nearly three per cent lower. US’s Dow Jones crashed 1,000 points after opening, after a 500-point fall on Friday — though it recovered later (See chart). Most emerging markets currencies were down between one and three per cent.
The bloodbath in global equities and emerging market currencies was triggered by another sharp drop in Chinese equities as market-boosting steps such as allowing pension money into domestic markets for the first time failed to stem a fall in stock prices. The Shanghai Composite Index fell nearly nine per cent on Monday.
In India, the benchmark Sensex ended a whopping 1,624.51 points, or 5.94 per cent lower, at 25,741.56, while the NSE Nifty lost 491 points, or 5.92 per cent, to 7,809. The fall was the highest, in percentage terms, since January 7, 2009, when it had fallen by 7.25 per cent. Both the indices ended at their lowest levels since October 2014.
The rupee ended at 66.65 a dollar compared to previous day’s close of 65.83, down 1.23 per cent — the most in almost two years.
The India VIX index, a gauge of market fear, jumped a record 64 per cent to 28.13, as the cost of buying options to hedge against further correction in the market spiked considerably.
“Market participants are more worried with the velocity of fall and not the extent. Volatility can push markets further down,” said Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services.
Overseas investors sold shares worth more than Rs 5,000 crore, while domestic institutions were net buyers to the tune of Rs 4,100 crore on Monday, according to provisional data provided by stock exchanges.
Market players said the government’s Rs 9,300 crore offer for sale (OFS) in Indian Oil Corporation, sucked out a lot of liquidity from the market, which would otherwise have provided some buying support in the secondary market.
Global commodities, including oil, fell to multi-year lows as investors tried to assess the impact of a slowdown in the world’s second largest economy. Brent crude prices traded below $44 a barrel for the first time since 2009, while industrial metals such as copper and aluminium, too, traded at 2009 levels. Government bonds in the developed world, yen and euro all rallied on the back of safe-haven buying.
Calling the sell-off “transient and temporary in nature,” Finance Minister Arun Jaitley said “there is not a single domestic factor in India which has either contributed to it or added to it.”
Jayant Sinha, minister of state — finance, added, “We agree with FM — it’s really external factors causing the volatility and turbulence we’re seeing across asset markets.”
Prime Minister Narendra Modi, too, discussed various aspects of crash with Jaitley, Sinha and chief economic adviser Arvind Subramanian. The prime minister was keen that further reforms be taken and public expenditure be stepped up to convert the global crisis into an opportunity for India.
Jaitley said domestic economic situation was strong and there was no payments crisis in the markets.
Reserve Bank of India Governor Raghuram Rajan said, “India is better placed compared to other countries with low current account deficit, and fiscal deficit discipline, moderate inflation, low short-term foreign currency liabilities, very sizeable base of forex reserves.”
In August, the benchmark Sensex is down 8.5 per cent and is on course for its biggest monthly fall since November 2011. After rising as much as 10 per cent, the index is down 6.4 per cent in local currency terms and 11 per cent in dollar terms this year. Another 6.7 per cent fall from the current level would wipe out all the gains seen since the election of the Narendra Modi-led National Democratic Alliance government on May 16 last year.
Rajan assured the Street that the central bank will have no hesitation in using foreign exchange reserves in a bid to reduce volatility. “We have approximately $380 billion in reserves to be used as and when the need arises. We will have no hesitation in using our reserves when appropriate to reduce volatility in the rupee,” he said.
According to Rajan, the Chinese move to devalue their currency is the result of the extraordinary monetary policies that been going on across the world. He added China is just the last step in that and comes from Asian countries.
Currency experts believe the rupee could breach the 67-a-dollar mark soon. The rupee had last ended at below 67 was on September 4, 2013. On August 28, 2013 it had touched an all-time low of 68.85 in intra-day trades. Back then, the primary reason for the weakening of the rupee was the tapering of bond buying programme by the US Fed, while now it is the devaluation of the yuan by China.