Indian equities went into a freefall again on Tuesday, shedding 3%, as the rupee?s fall to a record low and weak Asian markets spooked investors. The nod to the food security Bill from the lower house of Parliament added to the nervousness as concerns over a widening fiscal deficit mounted.
The rupee hit a record low of 66.19 against the dollar on Tuesday, driving the benchmark Sensex down 590 points, or 3.18%, to 17,968. The 50-share Nifty was down 189 points, or 3.45%, at 5,287.
?Very clearly, the passage of food security Bill was not well received by the market. At a time when the government is trying hard to meet the balance of payments, the food security Bill will further increase the deficits. The rupee will depreciate further and we expect the market to remain weak in the near term,? said a senior official from ICICI Securities, on condition of anonymity.
India was not the only market washed in red on Tuesday. Asian and European stocks fell over concerns about the prospect of a military strike against Syria by the US government. In Asia, Jakarta Composite and Straits Times declined the most at 3.7% and 1.63%, respectively. Shanghai Composite was the only index to end in the green in Asia with gains of 0.34%. The major European indices, the FTSE 100, DAX and the CAC opened weak and were trading deep in the red ? down anywhere between 0.63% and 1.54% ? at about 5 pm IST.
Back home, foreign institutional investors (FIIs) sold shares worth $207.5 million on Tuesday, taking their monthly net sales to $787 million. In the last seven sessions, they have offloaded $1.02 billion worth of shares.
Foreign brokerage Goldman Sachs, in a recent research note, highlighted the risk of a potential reversal in FII inflows: ?Very little foreign selling has occurred in Indian equities relative to the massive foreign inflows over the past few years. We see increasing risk of a potential ?flow reversal? in equities.? Bank of America Merrill Lynch had cautioned last week that any significant sell-off from overseas investors could bring the markets crashing as the FII ownership in Indian markets is at an eight-year-high.
?There is more room for the market to go down as our markets are way too dependent on foreign money. Foreign institutions aren’t aggressively selling at the moment, but I would not be surprised to see another $3-4 billion of foreign money flow out of Indian equities,? said UR Bhat, managing director, Dalton Capital Advisors, which advises FIIs on their investments in India.
While most of the major Asian markets have been suffering, India remains the worst performer in region YTD. The BSE Sensex has shed a whopping 23% in dollar terms in the current calendar year. In contrast, most of its Asian peers have fared much better ? China’s benchmark index Shanghai Composite has fallen just 5.63%, while South Korea?s Kospi is down 10%. Hong Kong’s Hang Seng (-3.5%), Taiwan’s Taiex (1.61%) and Japan’s Nikkei 225 (up 15.5%) have held up quite well.
On August 16, a weak rupee, coupled with a drop in US jobless claims, had driven the benchmark Sensex to post its biggest single-day point decline of 769 points since July 2009. Since then, the Sensex is down about 1,400 points, or 7.22%. The Sensex is now down 2,334 points, or 11.5%, since July 23 and has fallen for 15 out of 23 sessions during the period.
As of Tuesday, 40 of the Nifty 50 shares or 80% of index components were trading below their 200 day moving average (DMA) ? a key technical indicator used by investors to analyse bull/bear patterns as well as price trends. Similarly, 23 of the 30 Sensex stocks were trading below their 200 DMA. A fall below the 200 DMA is typically looked upon as a sign of long-term weakness in the market.
According to data from Bloomberg, the domestic currency has declined more than 18.6% since May 22 when the US Federal Reserve first hinted at a pull back in its quantitative easing programme. Since then, FII sentiments have reversed as they have dumped shares worth about $2.4 billion. Overseas investors had bought $14.2 billion worth of shares between January 1 and May 21.
If targets given by the leading brokerages are anything to go by, the rupee might fall even further. Deutsche Bank, for instance, said in a research note last week that the rupee could touch 70 against the US dollar in a month or so: ?We continue to believe that fundamentally the rupee is undervalued… but as numerous episodes of past currency crises have amply demonstrated… currencies can overshoot substantially and remain so for a long time. India, we fear, is entering such a zone,? said Deutsche Bank in a recent report.
?We continue to believe that fundamentally the rupee is undervalued… but as numerous episodes of past currency crises have amply demonstrated… currencies can overshoot substantially and remain so for a long time. India, we fear, is entering such a zone,? added Deutsche Bank in the report.
On Tuesday, 27 of the 30 Sensex stocks ended in the red. The wider market breadth was weak as more than 65% or 1,567 of the total stocks declined. Twelve of the 13 sectoral indices on BSE declined, with the banking, capital goods, power and realty indices losing more than 4%. BHEL (9.49%), HDFC Bank (8.04%), HDFC (7.7%), NTPC (5.86%) and L&T (5.3%) were the major losers. HDFC Bank and HDFC put together contributed about 215 points to the Sensex?s 590 point fall.
India VIX, a volatility index based on the CNX Nifty index option prices, jumped 11% on Wednesday to 29.42.
