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Nothing could stop the rupee and the stock markets from sliding on a terrible Tuesday — neither the Reserve Bank of India’s (RBI’s) intervention in the currency markets nor Finance Minister P Chidambaram’s repeated assertions from various forums that the government was on top of the economic situation.
The alarm over the fiscal situation following the passage of the Rs 1.35-lakh crore Food Security Bill eclipsed everything and renewed doubts about the government’s resolve to control spending ahead of general elections due next year. The result: After a three-day pause, foreign institutional investors (FII) pressed the ‘sell’ button once again. According to provisional data from stock exchanges, FIIs sold shares worth over Rs 1,300 crore on Tuesday.
Led by the banking index, the BSE Sensex slumped 590.05 points, or 3.2 per cent, to close at 17,968.08, wiping out Rs 2.12 lakh crore of investor wealth. The Nifty fell below the crucial 5,300 level and dropped 189.05 points, or 3.45 per cent. (MARKETS IN A MESS)
The rupee closed at a new low of Rs 66.19 a dollar, crashing 2.92 per cent — its biggest single-day percentage fall since October 1995, according to Thomson Reuters data, as investors sought safety in the dollar. This was also on concerns over a possible US-led military strike on Syria.
In early trade, the Indian currency had fallen tracking the non-deliverable forward (NDF) market. The one-month offshore NDF was trading at 67.85 a dollar, sharply weaker than the rupee’s close.
The yield on the 10-year benchmark government bond ended at 8.78 per cent, while the price of gold jumped 2.58 per cent to hit an all-time high of Rs 32,585 per 10 g.
In another major worry for investors, Brent crude oil touched a six-month high of $114.14 a barrel. On the Multi Commodity & Derivatives Exchange, crude oil and copper hit all-time highs on the rupee’s depreciation.
The outlook remains gloomy. Ambareesh Baliga, managing partner (Global Wealth Management), Edelweiss Financial Services, said he expected the carnage to continue due to a growing feeling that the government was taking ad hoc steps and not long-term measures.
The concerns over a rollback of the US’ bond-purchase programme also continued to weigh on the Indian market. CLSA’s Chris Wood said in his weekly commentary (Greed & Fear) that emerging countries, including India, remained vulnerable to further selling due to anticipated normalisation of US monetary policy and strengthening in the dollar. “India remains the Asian market with the most risk of a sovereign debt crisis,” he said.
Concerns over a potential ratings downgrade were also doing the rounds, though Standard & Poor’s is the only of the three major credit agencies to have a negative outlook on India’s BBB-minus sovereign credit rating. Fitch Ratings analyst Art Woo had on Monday warned that India was finding it more challenging to meet its fiscal deficit target as revenues slowed.
There is no respite in sight for the rupee, either. “Right now, capital flows are required. Those will help in stability. Once we get past the Federal Reserve’s next meeting in mid-September, we will have more clarity. If the Fed is materially more hawkish than expectations, the rupee’s move to 70 a dollar cannot be ruled out,” said Brijen Puri, executive director and head of markets, JPMorgan.
The rupee has lost more than 16 per cent against the dollar so far in 2013 — making it by far the worst performer among Asian emerging-market currencies tracked by Reuters — despite frantic attempts by the government and RBI to support it and repeated comments by the finance minister that the rupee is oversold.
In the stock market, the banking index suffered the most, falling 5.34 per cent. The power and capital goods indices fell 4.71 per cent and 4.51 per cent, respectively. Among stocks, BHEL crashed 9.49 per cent, followed by HDFC Bank (8.04 per cent), HDFC (7.70 per cent), NTPC (5.86 per cent) and JSPL (5.68 per cent). Only, three stocks in the 30-share Sensex — Infosys, Dr Reddy’s Labs and Sesa Goa — closed in the green (but less than one per cent).
Analysts and market participants are seeking clarity from the government. Mohan Shenoi, president (group treasury & global markets), Kotak Mahindra Bank, said: “The food security Bill has been partly responsible for today’s market movements. The government should clearly communicate that this is not additional subsidy. They should communicate that subsidy is redirected from diesel to food, as priorities have changed. They should now announce a one-time increase of Rs 10 a litre and deregulate the pricing, as was done with petrol.”
The fall in the rupee and stock markets was in tune with other Asian markets. For example, stocks in Philippines lost the most among Asian markets, falling 4.3 per cent, while Indonesian shares slid 3.1 per cent to one-year lows.
While the Indian rupee continued its downward spiral, the Malaysian ringgit reached a three-year low of around 3.33 a dollar.
