In an extraordinary move, the US Federal Reserve cut its discount rate by 50 basis points to 5.75% in an attempt to pump liquidity into the system and contain the subprime crisis. The discount rate is the rate at which banks borrow money from the Fed and is akin to the repo rate, a term widely used in India.
Earlier in the day, Asian indices barring the Nikkei-225 recovered sharply after suffering heavy losses in early hours of trade. The 30-share Sensex of the BSE, after slumping 578 points in morning trades, rallied on the back of short-covering in the derivative market to end the day at 14,141.52 points, losing 216.69 points, or 1.51%. The Sensex closed with a weekly loss of 4.88%, or 726.73 points. The broader S&P CNX Nifty of the NSE ended the day at 4,108.05 points, losing 70.55 points, or 1.69%.
Following Fed’s move, European markets, which started the day in negative territory after the weak closing of Asian markets, bounced back while US futures saw a minor rally late on Friday evening. It may have a positive impact on Indian markets, too, when they reopen on Monday.
Experts, however, are sceptical. Amitabh Chakraborty, president?equity, Religare Securities, said, ?The US Fed probably attempted to soothe the global financial community, but it might be short-lived. Asia and India may open positive on Monday, squeezing out shorts in a large way, but the longevity of such euphoria at this point is doubtful.?
Devesh Kumar, MD, Centrum Broking, said, ?Though the cut in the discount rate is a positive development, the step taken by the Federal Reserve will take time to play out in the crisis emerging from the US subprime mortgage market.?
The Hang Seng, which was down by more than 1,300 points in early trade on Friday, recovered smartly to end the day at 20,387.13 points, losing 285 points or 1.38%. However, the Nikkei-225 witnessed its worst fall, plunging 874.81 points, or 5.42%, to close at 15,273.68 its 52-week low. The Taiwan Weighted was down 111.08 points at 8,090.29 and the Seoul Composite was down 53.91 points, or 3.19%, to close at 1,638.07 points.
Back home, market experts attributed the late recovery in the domestic market to short-covering in the derivative segment in both Nifty futures and individual stock futures. Nifty August futures closed the day at 4,082 points, with the discount narrowing to 26.05 points to spot Nifty. Major stocks that provided critical support to the market at lower levels and ended the day on a positive note were RIL, Reliance Energy, HDFC, Wipro and Cipla. RIL gained Rs 13.65, or 0.78%, at Rs 1,752.80; Wipro gained Rs 6.15, or 1.31%, at Rs 475.50, and HDFC gained Rs 24.55, or 1.30%, to close at Rs 1,910.05.
Viral Doshi, derivative analyst and equity strategist, Networth Stock Broking, said, ?The recovery in the Indian market was partially because of short-covering in the derivative segment and also because of improvement of sentiment, globally. But still, the Indian market has not reached the bottom and we could witness another round of sell-offs.?
