Fiis Go Into Panic Mode

It happened in September 1994. Just when the Indian markets were chugging to record levels, the Peso crashed. That led to an emerging markets meltdown across the entire world.

This time round, its started with the Baht. Panic spread to the Philippines, Malaysia, Indonesia, Singapore and finally India. As the rupee slipped last week after 17 months of stability, FIIs started to get nervous. This week they pulled out their holdings across the whole of Asia. As a result of their exits, the Indian markets went into a tailspin. The Sensex has lost some 171 points in the last week.

The last two sessions have been particularily bad with the Sensex losing 210 points. It ended the week on 3876.08 which was a loss of 4.24 per cent despite valiant attempts at propping the rupee. The bank strike didnt help domestic investors as it stymied all financial activities.

The Nifty also showed a similar pattern as it slid to 1105 which was a 4.78 per cent loss. The BSE-Dollex showed losses of 5.15 per cent, not surprisingly as the rupee has edged down 1.6 per cent in the last week.

The erosion in the dollar value of FII holdings would induce them into nervousness anyway. In addition, they can claim profits happily for the market had moved up some 37 per cent since December.

Losses were seen right across the board. The Advances to declines ratio was bad, with 352 scrips rising against 941 declining.

Volumes were low generally and climbed only with the sell-out on Thursday and Friday.

Technically the short-term and intermediate trends are very easy to diagnose. They are both bearish, perhaps extremely bearish. The short term trend could perhaps be expected to show a technical rally early next week. However the intermediate trend has now been down for three weeks ever since the intra-day top of 4604 points on August 6. It could remain down for upto another 9 weeks.

The long term trend will be severely tested if the market pierces the 3750 point mark. The most critical support is however a band of congestion around 3575 points.

If that support breaks, then India is in for another long term bear market. It may not break because there is very strong buying demand around the 3575 level and, at 3750 points. But, it is likely to be tested at least once in the next two months.

There are two huge bearish factors still to be discounted. First and foremost, there is the rupee. Until it stabilises at some level they consider sustainable, FIIs will remain wary of re-entering in a big way. There is also the general panic factor induced by the Thai and Filipino meltdown. Even strong currencies like the Singapore dollar have been affected by the SE crisis.

The good news here is that the rupee appears to be fairly close to sustainable level already and the RBI is selling dollars forward in an intelligent attempt to smooth out future chaos.

The other major bearish factor is of course, the oil pool and the long overdue hike. This will not affect FII perceptions so much in fact they might actually be relieved. But, Indian players will have a knee-jerk reaction to the price hike. That could be the final straw if the rupee also continues to plummet.

The good news is that the rupee appears to be fairly close to sustainable level already and the RBI is selling dollars forward in an attempt to smooth out future chaos.