Scepticism over the adequacy of the US Fed's ‘Operation Twist', along with fresh concerns surfacing in the Euro zone, led to domestic benchmark indices shedding over four per cent on Thursday.
The Nifty lost 210 points to close at 4923.65, while the Sensex was down 704 points at 16361.15.
Global stocks and commodities too tumbled, US Treasury 30-year yields dropped to a record low and the Dollar Index climbed to a seven-month high amid concern central banks are running out of tools to prevent another recession.
The MSCI All-Country World Index sank 4.3 per cent at 11-35 a.m. in New York. The Dow fell 400 points or 3.5 per cent. The Standard & Poor's 500 Index lost 2.8 per cent as the UK's FTSE 100 Index, France's CAC-40 Index and Germany's DAX slid at least 4.7 per cent. The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 7.5 per cent to 40.11.
The Federal Reserve's maturity extension programme, popularly called ‘Operation Twist', entails the sale of $400 billon worth shorter-term treasuries (of three years or lower maturities) by June 2012 and use the proceeds to buy longer-term treasuries (from six-year to 30-year maturities) and extend the average maturity of securities in its portfolio.
“The Fed's expectation to put downward pressure on longer-term interest rates to ease financial market conditions and support economic recovery unfortunately did not go down well with the markets as they expected that $400 billon would not be enough,” said a senior banking analyst with a multinational brokerage.
Foreign institutional investors (FIIs) sold net equity worth Rs 1,306 crore whereas domestic institutions bought net equity worth Rs 743 crore. Retail investors on the BSE were net buyers and bought equity worth Rs 166 crore.
Mr Kishor Ostwal CMD, CNI Research, said: “The rupee was the single most important factor of today's fall. Hedge funds had to square off their positions after they lost more than 15 per cent on their portfolios in a single day after stop-losses were triggered.”
Mr Arun Kejriwal, Founder, KRIS Research, said: “It is very clear that what happened today is probably overdone, similar to the sharp up move last Tuesday. Markets are expected to be jittery in the near future, though today's fall is unlikely to be repeated. The depreciating rupee and large FII outflows in a depressed market added to the panic.”
Rupee at new low
The rupee was in for a free fall as it declined by Rs 1.23 against the US dollar ending Thursday's trading session at 49.56 to a dollar, which was also the day's low.
In the absence of intervention by the Reserve Bank of India, the rupee touched 49.56, a level last seen in June 2009.
Dealers said risk aversion is setting in among investors due to uncertainties in the euro zone, arising out of the Greece debt crisis and the downgrade of Italy are making the dollar look stronger against other currencies. This is putting pressure on the rupee, even though nothing has changed intrinsically, they said.
Nymex crude oil futures breached $82 to a barrel in intra-day trade on Wednesday.