The US Federal Reserve Chairman Ben Bernanke dropped a bombshell on Wednesday indicating a gradual end to the stimulus package rattling emerging markets.
The Sensex tanked, crashing 526 points or nearly three per cent to close at 18,719 points. The rupee too fell sharply, briefly touching a historic low of Rs 60 to a dollar, before the Reserve Bank of India intervened to shore up the currency. The rupee ended the day 87 paise down at Rs 59.58/dollar.
Bond markets hit
Even as the US bond market zoomed, in India, the bond market saw a huge sell-off forcing a halt in trading. The prices on Government securities fell sharply by 90 paise and yields rose 16 basis points.
Worried by the market’s reaction to Bernanke’s comments, India’s top economic policy makers tried to reassure the markets in the morning itself, but to no avail.
Planning Commission Deputy Chairman Montek Singh Ahluwalia said the Reserve Bank of India had a lot of firepower and could intervene when it thought it fit, while the Chief Economic Adviser to the Finance Ministry, Raghuram Rajan, said India had a range of instruments that could be used to cope with the situation.
Foreign institutional investors offloaded net equity worth Rs 2,094 crore, while domestic institutions bought equity worth Rs 1,333 crore. Retail investors on the BSE were net buyers of equity worth Rs 133 crore.
Ashok Gautam, President Treasury, Axis Bank, said: “This is a knee-jerk reaction with heavy sell-off in the emerging markets. As the uncertainty of the US bond buying programme is over, domestic factors will decide the fate of the rupee. Steps to bring sustained capital inflows need to be taken.”
The rupee opened sharply lower today at 59.50 against the previous close of 58.71. Once the rupee touched the 60-mark, market players said nationalised banks sold dollars under instructions from the RBI to stem the fall. Market experts, however, feel this cannot be a long-term solution.
Urgent steps
According to the treasury head of a public sector bank, “While other Asian currencies have fallen about 3-4 per cent against the dollar, the rupee has had a relatively bigger fall.” The domestic unit declined nearly 5 per cent in June and 9 per cent beginning January this year.
“The government cannot afford this and must take urgent steps such as attracting more foreign direct investment or announcing more export incentives. There is not much left for the RBI to do,” the treasury official said.
Fiscal reforms
Dipen Shah, Head - Private Client Group Research, Kotak Securities, said: “With liquidity flows likely to taper over a period, the economic fundamentals of respective countries will be very important to attract that liquidity. Countries with better fundamentals will attract more flows.
“For India, fiscal reforms in core sectors like infrastructure will be very important for the growth rates to revive and for more foreign money to flow in.”
Global markets
The Dow was down 1.6 per cent, Nasdaq 1.6 per cent, Germany’s DAX 3 per cent, UK’s FTSE 2.7 per cent at 9 p.m. IST, while the Hang Seng closed down 2.8 per cent and the Nikkei 1.7 per cent. Gold was down 5.5 per cent at $1,297 an ounce.
LOOKING BETTER
“I think markets have reacted in a surprising way as if they were disappointed by that statement,” said the Planning Commission Deputy Chairman. He expected any trend of inflows into the US from emerging markets to be a “temporary phenomenon.”
Ahluwalia said that on a day when there was global volatility, it would not be right to expect the rupee to remain unaffected. “The real question that investors have to look at is do they believe that the Indian economy is looking better than it was four-five months ago. When Fitch upgraded India’s rating, people read that to be an endorsement that Indian economy was indeed looking better. I believe they are correct.”
Raghuram Rajan said the markets were overshooting as they tended to in such times. Reiterating that a range of instruments were available to cope with the situation, Rajan said, “We are not going to flag them upfront that this is what we are going to do. As and when needed, we will call upon them.”
The RBI, according to experts, is hamstrung by a lack of firepower. The central bank has had to reduce its intervention in the market due to inadequacy of foreign currency reserves.
Bad news: Exporters
Terming the rupee hitting a life-time low as “bad news” for the economy, exporters said it will not only raise the import bill but also lead to volatility affecting their business.
Besides, global buyers are putting pressure on exporters to offer discounts of 10-15 per cent, Federation of Indian Export Organisations said.
“This is bad news... the exporters will not gain as it is a volatile situation which has perplexed them and they have not been able to finalise their orders,” FIEO Director-General Ajay Sahai said.
“We want a stable currency so that the business confidence of exporters is not affected,” he added.
Apparel Export Promotion Council said the continuous fall in the domestic currency would not help exporters much as international buyers are asking for discounts.
“We are in an unstable situation. Given the current scenario, we will lose, as importers have been asking for discounts and volatility coupled with speculation will impact business sentiments,” AEPC Chairman A. Sakthivel said.
The rupee turned a senior citizen, albeit for a short period, on Thursday. The US Fed Chief’s statement that monetary stimulus may be slowed if the economy there recovers triggered outflows from the Indian and other emerging markets.
The Indian currency touched a historic low of 60 to a dollar in intra-day trades before the central bank intervened and helped recoup some of the losses. It ended the day 87 paise down at 59.58 against the dollar.
Even as economists and market players were worried over the rupee’s fall, the Government sought to assure investors that there is no need to be ‘overly pessimistic’ and that it was a ‘temporary phenomenon’.
Fed Chief Ben Bernanke’s statement also triggered a sell-off in the government securities market with the prices on securities seeing a steep fall of 90 paise and yields rising by 16 basis points.
Sentiment turned bearish in the equity market too and the Sensex shed 526 points to close at 18719. All sectoral and broader indices eroded value and volatility was up four per cent and the volatility index IndiaVix closed the day at 19.19.
FIIs offloaded net equity worth Rs 2,094 crore while DIIs bought net equity worth Rs 1,333 crore. Retail investors on the BSE were net buyers of equity worth Rs 133 crore.
Sun Pharma and Ambuja Cement were the only two stocks that closed in the green among the Nifty 50 which closed at 5656 down 166 points.
Ashok Gautam, President Treasury, Axis Bank, said, “This is a knee-jerk reaction with heavy sell-off in the emerging markets. As the uncertainty of the US bond buying programme is over, domestic factors will decide the fate of the rupee going forward. Steps to bring sustained capital inflows need to be taken.”
The rupee opened sharply lower at 59.50 on Thursday against the previous close of 58.71 after the Fed statement.
Once the rupee touched the 60-mark, market players said nationalised banks sold dollars at the Reserve Bank of India’s behest to stem the fall.
Urgent steps
However, market experts say this cannot be a long term solution. According to the treasury head of a public sector bank, “While other Asian currencies have fallen about 3-4 per cent against the dollar, the rupee has had a relatively bigger fall.”
The domestic unit declined nearly 5 per cent in June and 9 per cent beginning January this year.
“The government cannot afford this and must take urgent steps such as attracting more foreign direct investment or announcing more export incentives among others. There is not much left for the RBI to do,” the treasury official said.
Dipen Shah, Head - Private Client Group Research, Kotak Securities said “With liquidity flows likely to taper down over a period of time, the economic fundamentals of respective countries will be very important to attract that liquidity. Countries with better fundamentals will attract more flows. For India, fiscal reforms in core sectors like infrastructure will be very important for the growth rates to revive and for more foreign money to flow in.”
Seeking to assuage the sentiment in the equity, bond and currency markets, policy makers said the country’s economic prospects are solid and can weather the storm that may have been created by the US Federal Reserve Chairman Ben Bernanke’s remarks on possibility of a wind down in bond buying.
Deputy Chairman of the Planning Commission Montek Singh Ahluwalia told reporters here, “I think markets have reacted in a surprising way as if they were disappointed by that statement (by Bernanke)”.Stating that he would not like to pronounce any judgment on global markets, Ahluwalia said he expected any trend of inflows into US from emerging markets to be a “temporary phenomenon”.
He pointed out that it was not only the rupee that had depreciated against the US dollar, but other emerging market currencies had also sharply fallen against the greenback.
On a day when there is global volatility, it is not right to expect the rupee to remain unaffected, he said. He also pointed out that RBI had a lot of “firepower” and could intervene when it thinks it was necessary.
“The real question that investors have to look at is do they believe that Indian economy is looking better than it was 4-5 months ago. When Fitch upgraded rating, people read that to be an endorsement that Indian economy was indeed looking better. I believe they are correct”.
Montek said more good things are likely to happen in coming weeks.
He reiterated that policymakers have kept their eyes fixed on inflation and were keen to bring it down even further.
In a separate briefing, Chief Economic Advisor Raghuram Rajan said that markets are overshooting as they tend to in such times.
He said India had a range of instruments that could be called upon to cope with the situation, if needed.
“We are not going to flag them upfront. As and when needed, we will call upon them,” Rajan said.
Tapering off bond-buying programme does not mean that US will unload bonds in the market, he said.
“My sense is the US Fed has said it would start tapering towards the end of the year. Fed believes that the stock of bonds are going to be held.. they are not going to reduce that stock. They are going to reduce the flow not the stock,” Rajan said.
As long as the stock does not move abruptly, it is not the flow that is so important, he pointed out.