Indian markets plunged sharply on Tuesday after DMK withdrew its support to the UPA Government though Finance Minister P. Chidambaram assured that the Government enjoyed majority in the Parliament House.This development eclipsed the impact of the RBI rate cut by 0.25 per cent.
Drawing the attention of the media, Finance Minister P. Chidambaram said that the DMK patriarch has said that there was room for review of DMK’s stand if Parliament adopts a resolution. He denied that there was any crisis for the UPA Government.
But investors were not impressed by Chidambaram's statement.
The 30-share BSE index Sensex was down 288.10 points (1.48 per cent) at 19,008.10 and the 50-share NSE index Nifty was down 89.3 points (1.53 per cent) at 5,745.95.
All BSE sectoral indices ended in the red. Among them, realty, capital goods, and metal stocks were the worst-hit with each down by over 2.5 per cent.
What was more hurting for the market is that the DMK’s blow came after the GoI appeared to be on course to keep the inflation and current account deficit (CAD) under check.
The induction of P. Chidambaram as Finance Minister during mid-2012 also set in motion key policy changes like FDI in retail that revived foreign institutional investors’ interest in the market.
Governance may take backseat
But the latest political turmoil might keep the Centre focused more on fire-fighting and in keeping the UPA going to fight the next Lok Sabha polls that might be advanced. In such a scenario, the governance may take a backseat which might keep the market guessing.
The domestic sentiment was also hit as the Reserve Bank, in its monetary policy review, signalled that the headroom for further monetary easing remains quite limited hurt the domestic sentiment.
In its guidance, the RBI has noted that risks on account of the current account deficit remain significant notwithstanding likely improvement in Q4 over an expected sharp deterioration in Q3 of 2012-13.
The Sensex touched the day's high of 19,378.61 soon after the RBI monetary policy announcement, but touched a low of 18,942.88 after the RBI guidance.
Global markets
European stocks fell and Asian stocks pared gains as Cyprus's Parliament prepared to vote on a tax on bank deposits, which was needed to secure a bailout.
Japan’s Nikkei 225 rose 247.60 points or 2.03 per cent to 12,468.23, Hong Kong’s Hang Seng was up 18.49 points or 0.08 per cent at 22,101.85 and Singapore’s Straits Times was up 15.79 points or 0.48 per cent at 3,272.26.
STOXX 50 was down 14.46 or 0.53 per cent at 2,691.01, FTSE 100 was down 15.92 or 0.25 per cent at 6,442.00 and DAX fell 41.10 or 0.51 per cent to 7,969.60.
Investors also awaited the US Federal Reserve's policy meeting on Tuesday and Wednesday for the Fed's assessment of positive US economic indicators and signs it may consider scaling back its monetary stance.