Fears of the US Fed reducing stimulus and the dip in Chinese Purchasing Managers’ Index (PMI) for May spooked the market on Thursday.
The Sensex crashed 388 points to close at 19,674, while the Nifty shed 127 points to end the day at 5,967.
All broader (mid- and small-cap) as well as sectoral indices closed significantly in the red. Rate-sensitive sectors such as banking and real estate were among the top losers.
Monetary policy
On Wednesday night, Ben Bernanke, Chairman of the US Federal Reserve, said the Federal Open Market Committee was prepared to increase or reduce the pace of its asset purchases to ensure that the monetary policy stance remains appropriate as the outlook for the labour market or inflation changes.
Across the globe, the Chinese PMI missed the estimated 50.4, clocking 49.6. A PMI under 50 indicates that an economy is shrinking.
Tirthankar Patnaik, India Strategist and Chief Economist Religare Capital Markets, said: “There are reports of bond purchases of about $19.4 billion by the Bank of Japan, supporting yields (down from one per cent levels), and prompting flow into the Japanese government bond market, to support the yen. “This strengthening of the yen is near-term, however.”
While FIIs were net buyers of equity worth Rs 316 crore, DIIs (domestic institutional investors) were net sellers for Rs 539 crore. Retail investors on the BSE were net buyers, picking up Rs 113 crore worth equity.
According to Abhishek Goenka, Founder and CEO, India Forex Advisors, “The Indian rupee has plunged more than two per cent in just a week in spite of $2.4 billion of inflows in the last 10 days. The end of quantitative easing will lead to the rupee weakening further due to the dollar index gaining momentum.”
He said it will also affect the the corporate sector and the local market, too, as the overall reduction in dollar inflows will make trade credit costlier for both importers and exporters.
The low dollar inflows will result in a vicious cycle of ‘high trade gap-high dollar demand’, bringing more pressure on the rupee.
The volatility index VIX closed at 18.73, up 6 per cent.
Chidambaram, Rajan try to soothe market
Amidst chaos in the markets, with stock indices plunging and the rupee touching a nine-month low, the Finance Ministry made a valiant effort to bring order in the market. Finance Minister P. Chidambaram asked the people not to be nervous, while Chief Economic Advisor Raghuram G. Rajan said there is no need to panic on the rupee front.
“We have been looking at what’s been happening in the market. We think that Federal Reserve Chairman Ben Bernanke’s statement has been misunderstood or misinterpreted,” Chidambaram told newspersons. He also said, “If you look at the statement carefully, he has clearly indicated that he will continue with quantitative easing in the foreseeable future.”
Rajan later said, “There is no panic-based need for new measures and I don’t see any reason for apprehension.”
shishir.s@thehindu.co.in