In a triple whammy, benchmark BSE Sensex and Indian rupee went into a freefall while gold price surged as fears of a return to capital control regime haunted investors who remained unconvinced that there would be no further curbs.
The S&P BSE Sensex plunged the most in four years and the rupee plummeted to a record low amid fears that capital controls would return as the government attempts to reduce exchange-rate volatility and stem the burgeoning current account deficit (CAD) in India. Gold gained the most in two years.
Investor sentiment was also hit by expectations that an improving US economy would result in the flight of foreign capital from the domestic markets.
The BSE Sensex fell 769.41 points, or 3.97 per cent, to 18,598.18, leaving investors poorer by more than Rs 2 lakh crore. The rupee breached 62 for the first time, falling to 62.03 before recovering to close at a record low of 61.65.
Prices of gold, traditionally considered a safe haven for investors, shot up by Rs 1,310, the most in two years, to reclaim Rs 31,000 per 10 grams level in Delhi.
"Weak international cues and rising dollar-rupee rates triggered selling in the Indian equity market," said Nagji K Rita, Chairman & MD of Inventure Growth and Securities. "The rising bullion is now seen by many as a safer bet to park funds. And such a change in sentiment adds further selling pressure on equities as an asset class."
To restrict the outflow of foreign currency, the RBI had on August 14 announced stern measures, including curbs on Indian firms investing abroad and on outward remittances by resident Indians.
The government and the RBI, seeking to calm rattled investors, today said there was no reverting to the capital control regime.
Finance Minister P Chidambaram said the market should not be so sensitive to data flowing from the US.
"When calm is restored in