Freefall!

Marketmen revel in cataclysmic sobriquets. But rarely has a period of economic upheaval seen as many Manic Mondays, Turbulent Tuesdays and Freaky Fridays. Indeed, just when it appeared that equity markets could take no more punishment, the growing global disquiet over an economic slowdown and RBI?s quiescence on key rates brought the bellwether Sensex to its knees.

It doesn?t get much crazier than this. Crude fell for the fourth consecutive week to $63 a barrel, despite the cartel of world oil suppliers, Opec, cutting production by 1.5 million barrel a day on Friday to shore up prices. That alone exemplifies the extent of growing panic in world markets, including India. The Reserve Bank of India also left key rates in holding pattern in its mid-term review of monetary policy, offering domestic money and equity markets with nothing to cushion their fall.

As companies from all major economies reported lower profits over the last two days, every stock market index in Asia, Europe and the US slumped on Friday. The MSCI World Index fell 4.3%. The index has lost 45% in 2008, its worst ever performance. Yields on treasury paper, including those in India, also plunged. Investors across the world dumped equity, migrating to the safety of government paper as concerns spread that despite coordinated action by global central banks and governments, a worldwide slowdown cannot be averted.

On Friday, the BSE Sensex plunged 1,070.63 points, or 10.96%, its second steepest ever intra-day fall. The S&P CNX Nifty of the NSE ended at 2,584 points, losing 359.15 points from its previous close. The broader BSE 200 Index also declined 11% to 1,037.80. As the dollar strengthened against most global currencies, the rupee weakened to a record 50.165, before closing at 49.96 on the week?s last trading day. The currency has lost 2.2% this week against the greenback.

The India Vix, the volatility index of the NSE, is now at 54%, near its annual high, indicating a significant build up of risk perception about the way stock prices will move in the next 30 days. Ironically, liquidity in the financial system improved even further with call rates dropping to less than 6%, which led banks to park Rs 43,650 crore in excess funds with RBI on Friday. This reflected the impact of the central bank?s rate cuts?including of repo by 100 basis points?earlier this week.

Analysts said there was little RBI could have done to change Friday?s stock market plunge, even if it had cut rates. ?The key operative phrase in the policy reading was RBI?s assessment that domestic economic activity is straddling a point of inflexion. In other words, while India?s economy is still not doing too badly, one wrong move will be enough to tip it over the edge,? said Saugata Bhattacharya, vice-president, business & economic research, Axis Bank.

As expected, RBI lowered its estimate of GDP growth to 7.5% from 8%, but governor D Subbarao, explaining the rationale for not changing rates, said along with the need for moderation in interest rates, double-digit inflation remained a critical policy concern. ?Inflation continues to be a concern at 11%?it is beyond the tolerance level and unacceptable. Despite its downward trend, we cannot let our guard slip,? he said.

Finance minister P Chidambaram echoed that policy position. ?RBI will continue to deploy both conventional and unconventional tools. We cannot rely only on conventional measures, but we will have to adopt unconventional or unorthodox measures,? he said.

On the markets, Sensex heavyweights like RIL and Suzlon saw consistent selling. RIL dipped to Rs 991, only to recover above the Rs 1,000 mark. State Bank of India shares lost 15% and ICICI Bank fell 14% as RBI?s quiescence disappointed investors who hoped for an improvement in banking stocks.

According to Sebi figures, overseas funds sold a net Rs 347.40 crore worth of shares on October 24, taking capital outflows from India this year to $12.11 billion. As a result, according to RBI data, the country?s total foreign exchange reserves fell by $118 million to $273.87 billion.

The collapse of Indian equity markets was in line with that of its Asian peers. In plummeting European markets, trading had to be stopped several times in the day after the UK said it was in recession.

On the bright side, the redemption pressure both in equity- and debt-linked schemes seems to have slowed with liquidity pouring into the market following the CRR and repo rate cuts. Both nervous and needy investors are withdrawing money from different schemes. ?However, a majority of investors do not want to get out of their investment at the lower level of the net asset value as the equity market has bottomed out now,? a senior fund manager from a domestic fund house said.