Key Indian equities index sees biggest fall ever (Second lead)October 24th, 2008 - 5:15 pm ICT by IANS
Mumbai, Oct 24 (IANS) Indian equities markets Friday were in the midst of complete mayhem with ruthless selling by foreign institutional investors sending a key equities index into its biggest fall ever in percentage terms.At 2.30 p.m., the benchmark 30-share sensitive index (Sensex) of the Bombay Stock Exchange was ruling at 8,797.70, down 974.00 points or 9.97 percent from its previous close Thursday at 9,771.70 points after falling by 10.39 percent to hit an intra-day low of 8.756.35 points.
In the past, on Jan 21, 2008 and in May 2004 after the United Progressive Alliance coalition government came to power, the Sensex had crashed by 10 percent much before noon and, therefore, brought trading to a halt by hitting the lower circuit filter.
This time, however, the more than 10 percent fall Friday happened after noon so the lower circuit filter will now come into play only when the fall is 15 percent or more.
“As far as I can remember this is the largest fall in percentage terms in recent history,” said Jagannadham Thunuguntla, head of the capital markets arm of India’s fourth largest share brokerage firm, the Delhi-based SMC Group.
The Sensex had opened more than 200 points down and after hitting a low of 8,940.48 at noon immediately after the Indian central bank announced its mid-term review leaving all key rates unchanged, recovered somewhat only to slide again to hit an intra-day low of 8,756.35 points.
In percentage terms, the fall of the broader 50-share S&P CNX Nifty index of the National Stock Exchange (NSE) was even higher.
At 2.30 p.m., the Nifty at 2,622.20 points had shed 219.75 points or 10.90 percent from its previous close Thursday at 2,943.15 points.
“The RBI leaving rates unchanged is only an excuse because the nervousness in the market is palpable and although the situation is unprecedented this crash was expected,” Thunuguntla said.
He also welcomed the RBI move not to add more liquidity because he said the role of the RBI is to monitor growth and inflation and not to help out the capital markets.
“What is the guarantee that more liquidity would have stopped the fall in equity prices?” he asked, adding: “On the other hand, adding more liquidity would have added to inflationary pressures and might lead to more problems for the real economy.”
“There is a liquidity crisis globally and Indian markets are not immune to that,” he said. “FIIS are selling ruthlesslessly to take out whatever money they can because yen carry trade has gone even more out of hand and they are under tremendous liquidity pressure in their home countries.”
In yen carry trade, hedge funds used to borrow yen denominated loans from Japanese banks at a negligible interest rate of 0.5 percent and then converted these funds into other currencies and invested across the globe.
So, even if they earned a return of as low as 2-3 percent they still made a profit on those investments because their cost of funds was only 0.5 percent.
Now with the dollar appreciating against the yen the conversion rate has hit a 13-year high. Currently the exchange rate is 95 yen to a dollar when a year ago it was 109 yen to a dollar. This means yen denominated loans have become costlier by almost 15 percent so that the cost of yen denominated loans is now 15.5 percent against only 0.5 percent earlier.
This is forcing hedge funds with yen denominated loans to repay those loans as soon as possible and stop losing money. This is the reason they are selling off whatever assest they have, wherever they have to repay yen denominated loans.
“The markets are not a proxy for the real economy. When there was 9 percent growth in the last two years, markets grew by 40 percent. Now even if domestic economy grows 7-8 percent, markets can crash by more than 50 percent,” he said.
When there was great global liquidity, FIIs invested here pushing up the markets, he said. Now there is no global liquidity so FIIs are pulling out in a hurry.
“I think the RBI’s move not to add further liquidity is, therefore, prudent. The markets will correct themselves only when the global liquidity situation stabilizes,” he said.
It is also too much to expect that domestic financial institutions with investible surpluses in the range of $10-15 billion can stem the rot when market capitalization losses are to the tune of $600-700 billion, he said.
“We enjoyed the benefit of high global liquidity, now we have to bear the other side of the stick,” Thunuguntla said.
Global cues too are weak throughout with the Dow Jones futures that is traded on European markets opening 400 points down Friday, most European markets 7-8 percent down and Asian markets too shedding value.
“There is nothing to stem the nervousness,” Thunuguntla said.