Indian equity markets were washed in red on Friday as the rupee?s decline to record lows against the greenback spooked investors and drove the benchmark BSE Sensex to post its biggest single day point decline since July 2009.
The rupee hit a record low of 62/$ on Friday, before closing at 61.65. The fall came after the RBI on Wednesday introduced restrictions on overseas investments by corporates and curbs on forex remittances by resident Indians. This led to fears that the central bank may consider more traditional forms of capital controls on outflows of foreign capital.
In addition, a drop in US jobless claims to its lowest level since October 2007 raised fears that the US Federal Reserve could start to cut back on its stimulus programme, leading to a flight of capital from emerging markets such as India.
?The view on India is largely bearish. It is very difficult to find someone who is not bearish on India. Yet, the market positioning is long. This does not reconcile and at some point, FIIs will have to reduce their positions on India,? said Bhanu Baweja, global head of emerging market cross asset strategy, UBS AG. ?We are paying the bills for years of bad policy, there is no elegant exit,? he added.
The benchmark BSE Sensex slid 769 points, or 3.9%, to close below the psychological 19,000-mark at 18,598 on Friday. The broader 50-share index Nifty was down 234 points, or 4.08%, to 5,507. The Sensex has fallen 1,493 points, or 7.4%, in 11 out of the last 16 sessions and is down 4.3% in the year to date. On Friday, foreign institutional investors sold shares worth $91 million on Friday, while domestic institutional investors bought shares worth $119 million. In the year to date, FIIs have purchased shares worth $12.5 billion. ?The fall in market reflects the sharp rise in US bond yields, which make the carry trades less attractive. The measures by the government to curb the fall in rupee are not concrete and are causing more damage,? said a fund manager of a Hong-Kong based institutional firm that offers investment services in Asian equities.
?These measures may have a negative impact on FIIs just like it did to Malaysian and Indonesian equities in the past. In all probability, foreign proprietary desks will start paring down their exposure to Indian equities,? added the fund manager.
Raamdeo Agrawal, co-founder and joint MD at Motilal Oswal, blamed domestic woes for the current pain. ?Pessimism on the Street has begun to develop a strong grip. Global factors are hurting the economy, but the market is facing huge selling pressure vis-a-vis other emerging markets because of homegrown problems. Growth has slowed down drastically and the economy has become more dependent on imports,? said Agrawal.
With the currency’s freefall and the RBI’s moves to tighten liquidity, the growth outlook on India has been getting increasingly gloomy. Several foreign brokerages have reduced their targets for the benchmark indices. Earlier this week, Japanese financial services firm Nomura reduced its FY14 Sensex target to 20,000 from 21,700, citing weak economic growth and renewed upward pressure on the interest rate cycle.
Goldman Sachs, Deutsche and Morgan Stanley have also trimmed their targets for Indian equities. Brokerages have also cut their growth projections for the Indian economy. For instance, on August 6, CLSA cut its growth forecast for FY14 to 5.2% from 5.5% earlier ?There may be many legitimate reasons for the weakness of the markets, but attributing it to a move towards capital controls is plain ridiculous. The forex markets like nothing other than momentum and they are getting carried away,? said Samir Arora of Helios Capital in response to Friday’s plunge.
The latest edition of Bank of America Merrill Lynch fund manager survey showed that growing worries about India’s economic growth and currency risks had forced Emerging Market (EM) to significantly reduce their exposure to Indian equities. According to the survey, 15% of EM investors were bearish on Indian equities in July compared with 7-8% in June.
Earlier this month on July 6, the Indian stock market had lost its trillion-dollar tag in terms of total market capitalisation of all listed companies on Tuesday, the first time since May 3, 2012.
Among its peers, all of the key Asian indices ended in the red on Friday. Jakarta Composite lost the most at 2.5%.The other major losers included Nikkei 225 and Straits Times, which declined by 0.7% each. The major European indices ? the FTSE 100, DAX and the CAC ? opened weak and were marginally trading in the red at about 5.00 pm IST.
Back home, the market breadth was weak on Friday, with 1,583 or nearly 65% of the stocks traded on the BSE ending lower. 29 of the 30 Sensex stocks declined. All of the 13 BSE sectoral indices ended in the red, with the Bankex, Realty, Metal and Consumer Durables indices losing more than 5%. Banking stocks such as Yes Bank (11.4%), Canara Bank (10%), Bank of India (9.7%), HDFC Bank (5.4%) and ICICI Bank (5.2%) were pummelled on the bourses.