Markets slump as liquidity squeeze may hurt growth

Markets opened sharply lower on Tuesday, amid weak Asian cues, on concerns that the liquidity squeeze by the central bank would hurt growth and impact equity inflows.

Markets opened sharply lower on Tuesday, amid weak Asian cues, on worries that the liquidity squeeze would hurt growth going forward and impact equity inflows.

Further, Asian Development Bank (ADB) said on Tuesday it has lowered its growth forecasts for developing Asia this year and the next as a softer outlook for the world's second-biggest economy China meant subdued economic activity elsewhere in the region.

ADB also lowered for the second time this year its forecast for South Asia's largest economy India to 5.8% from its April estimate of 6.0%, with growth still constrained by supply-side bottlenecks and sluggish progress in pushing through structural reforms.  

At 9:30AM, the 30-share Sensex was down 270 points at 19,764 and the 50-share Nifty was down 94 points at 5,937.

Subbarao D, RBI governor In a move to check the currency's volatility, the Reserve Bank of India has decided to lower rupee liquidity in the system by capping the liquidity adjustment facility at (LAF) Rs 75,000 crore from Wednesday.

As a result, the marginal standing facility (MSF) rate has been raised 200 bps to 10.25 bps. The MSF rate is considered a penal rate and banks avail of this as a last resort. Accordingly, the bank rate also stands adjusted at 10.25 per cent.

The Indian rupee appreciated sharply following the RBI's announcement and was up 53 paise at Rs 59.36 to the US dollar in early trades.

"Yesterday evening the RBI has taken certain key steps to control liquidity and this is likely to have a near term negative impact on the Banking counters," Angel Broking said in a note.

Thus going forward, a fall and close below Friday's low of 11589 would indicate a failure of the positive breakout and would negate all bullish prospects. On the upside, yesterday’s high of11812 will now prove to be a key resistance of the Bank Nifty. Only a move beyond this level would warrant a positive outlook for banking counters, the note said.

The Bank Nifty was down 544 points or 4.6% at 11,246.

Financial stocks witnessed a sell-off in early trades with ICICI Bank, HDFC, HDFC Bank and SBI down 3-6% each.

Other Sensex losers include index heavyweight Reliance Industries and engineering major L&T.

FMCG and select pharma shares were trading with marginal gains in early trades.

In the broader market the BSE Mid-cap was down 1.4% and BSE Small-cap index was down 0.7%.

Market breadth was weak with 657 losers and 233 gainers on the BSE.