Circuit Breaker!

Written by Markets Bureau | Mumbai | Updated: May 19 2009, 07:30am hrs
Stock markets set off their upper circuit breakers on Monday for the first time in history, spurred by the election victory of the UPA government. In an interesting twist, the lower circuit breakers had tripped five years ago after markets plunged 6% when the alliance was voted to power with a much thinner lead and the tacit support of the Left.

In under a minute of the opening bell, both the 30-share Sensex of the BSE and the 50-share Nifty of the NSE hit their upper 15% limits, forcing the exchanges to halt trading for two hours. Trading resumed briefly at 11.55 and again, pent-up demand for buy orders triggered the upper circuit breakers.

Traders rejoiced and some even went out for an early lunch. Sebi and exchange officials were ensconced in a late night meeting to prepare for tomorrow. Finance secretary Ashok Chawla said in New Delhi that Sebi officials were tracking developments at the exchanges.

The trends were obvious even before the markets opened. We got a sense of events to come on the domestic market when we saw the SGX Nifty (Nifty listed on the Singapore Stock Exchange) surge over 12%, with its trading volume registering three times more than its average daily volume. With clarity on economic reform emerging after the elections, there was a huge rush from investors, who were waiting on the sidelines to buy Indian equities, said Elara Capital analyst Arup Misra.

When trading was suspended at 9.55 am, the benchmark Sensex was up 1,789.88 points or 14.70% at 13,963.30 points and the broader S&P CNX Nifty was up 531.65 points or 14.48% at 4,203.30 points. When the market reopened for trading at 11.55 am, the Sensex again hit the 20% upper circuit breaker within 16 seconds and trading had to be halted for the rest of the day. The Sensex finally closed the day at 14,284.21 points, gaining 2,110.79 points or 17.34% while the Nifty closed at 4,323.15 points, up by 17.74% or 651.50 points.

In one dayor, more accurately, the one minute or so of actual trading--the gains in investors wealth, measured in terms of cumulative market capitalisation of all the listed companies in the country, was more than $100 billion, a world record.

Ironically, most traders and investors were disappointed on Monday, as they were unable to execute buying orders. Ambit Capital CEO-institutional equities & equity proprietary trading Andrew Holland said, The pace at which the market surged higher in a short time was a pleasant shock, but most investors were unable to buy.

With traders and investors unable to execute their trades, volumes and turnover on the exchanges were very thin. The BSE registered a turnover of just Rs 127 crore, compared with its average daily turnover of Rs 5,140 crore, with trades executed in only 847 shares. The combined turnover in the cash and derivatives segment of the BSE and NSE totalled Rs 3,103 crore.

Meanwhile, with the prospect of a stable and reform-friendly government at the Centre, foreign fund houses have started re-rating India after the election results. Jyotivardhan Jaipuria and Anand Kumar, research analysts with DSP Merrill Lynch India, in a note circulated clients, stated: We expect markets to be buoyant in anticipation of acceleration in reform measures by the government. A re-rating of the markets is likely to take markets to expensive territory relative to current earnings. A pump priming of the economy, sharp foreign inflows leading to lower interest rates and stronger rupee and an improving fiscal situation would improve the optimism regarding growth next year.

Overseas funds bought a net Rs 1,000 crore ($201.9 million) of Indian equities on May 15, increasing their total stock purchases this year to $2.13 billion, according to latest Sebi figures. The rupee gained, too, by 152 paise, or 3.08%, to a five-month high of 47.88/89 against the dollar on hopes of heavy capital inflows.

With equity trading closed for most of the day, traders and speculators shifted their activity to the currency futures segment, helping the NSE clock record turnover and volumes. The NSE currency derivatives segment witnessed volumes of more than 1 million contracts in $-rupee futures, valued at over Rs 5,090.80 crore.

Sources said all large institutional players went into a huddle to rework their investment strategies in expectations that the market would be strong for the next few days. The short term and medium term look extremely positive. But, there are concerns for the longer term and this depends on the government delivering on expectations, said Reliance Money MD Sudip Bandhopadhyay.

With such a strong momentum and several players stuck with short orders, the chance of another surge on Tuesday is not ruled out. There will be investors who still want to buy, while there will also be investors who want to book some profits. So, it is very difficult at this point to say which direction the market would tread, adds Holland.

Nifty 3,800 call options have 44.76 lakh shares as outstanding position, while Nifty 4,000 call options have an outstanding open interest of 40.42 lakh shares. A call is the right to buy a share. So, when the markets resume tomorrow, investors will attempt to buy shares to settle their positions, which could further drive up the market.

Tripping the line

According to Sebi guidelines, the circuit breaker kicks in at three stages of index movement: 10%, 15% and 20%, irrespective of whether the market moves up or down. These percentages are translated into absolute points of index variations on a quarterly basis. For the current quarter, applicable Nifty points are 300 points for 10%, and so on. Similarly, applicable Sensex points are 975 points for 10%, 1,450 points for 15% and 1950 points for 20%. Calculations are based on Sensex and Nifty closes on March 31. Both the Sensex and Nifty breached their allowed variations on Monday within a few seconds of opening.