Triple whammy slams the Indian stock market.
By Rajiv Theodore
NEW DELHI: It was a black Friday by all standards that spread mayhem on Mint Street. The havoc was essentially spread by a triple whammy. The rupee slid to an all-time low against the dollar, shares crashed to an abysmal levels unheard of in four years and the price of gold shot to a six month–high just as Indians were gearing up for the oncoming wedding season when the yellow metal is most sought after.
The S&P BSE Sensex on Friday bombed at 769.41 points, the most in four years amid fears the government may move to a capital-control regime to curb forex volatility and narrow Current Account Deficit (CAD).The markets were also spooked by expectations that an improving US economy would lead to a flight of foreign capital from the domestic markets.
The Sensex fell 769.41 points, or 3.97 per cent, to 18,598.18, leaving investors poorer by more than Rs. 2 lakh crore. The rupee breached 62 for the first time, falling to 62.03 before recovering to close at 61.65. Prices of gold, traditionally considered a safe haven for investors, shot up by Rs. 1,310, the most in two years, to reclaim Rs. 31,000 per 10 grams level in Delhi.
The Friday of fear was also sparked by news that the global investors inspired by strong signs of recovery in the US are pulling out of emerging markets indices and from currencies like the rupee. Overseas funds have pulled out $11.58 billion from India’s equity and debt markets in just over two months.
Friday’s fall came two days after the release of strong US employment data and measures by the RBI to restrict the amount of dollars Indians can spend abroad. Markets were closed on Thursday, so Friday was the first chance investors got to react.
The Reserve Bank of India (RBI) announced a series of measures in the last two months to curb volatility in the foreign exchange market. The piece-meal approach of the government and the RBI failed to calm the markets, which were hit by negative news from global markets. The country’s widening CAD continues to be a serious concern. As a latest measure, the RBI announced restrictions on foreign exchange spending by individuals and also on overseas investments by companies. This attempt to impose partial control on capital outflow totally spooked the markets.
Finance minister P Chidambaram said the government was monitoring the situation. “A number of measures are being taken. Let’s wait to see what the first quarter growth rates are,” he said.
A sliding rupee means that India needs to shell out more cash to import fuel, and this in turn raises the prices of transporting goods, leading to higher inflation. Also, a high inflation means that the RBI will hesitate to cut interest rates, a step needed to boost economic growth. The impact on the consumer is harsh. He now needs to keep paying large chunks of the income every month towards repaying housing loans, even as the cost of food and petrol rises. Moreover, the prospect of a decent salary hike would recede because of a struggling economy.
“There was this budget which we used to plan for a month, now we have to be on the look-out each day,’’ Rajeshwari Rammohan, a Delhi-based homemaker said.
If that was not all, gold prices hit a six-month high of Rs. 31,010 per 10 grams. The government has warned Indians to cut down on gold consumption so as to keep the current account deficit — the difference between dollar inflows and outflows — under control.
Also, inflation figures, measured by Wholesale Price Index, rose to a five month high of 5.79 per cent in July as compared to 4.86 per cent in June. And, the recent industrial output data pointed to contraction by 2.2 per cent for the month of June.
The government and the Reserve Bank unveiled several measures to stop the slide in the rupee on Wednesday, but these steps failed to shore up the rupee. Analysts said the massive drop in markets is due to panic selling by investors because the local currency has moved from 54 to 62 in just 3 months.
Foreign investors are witnessing erosion of wealth as the rupee continues to slide to historic lows virtually every week. This continued weakness has forced them to book losses and unwind their positions.
Brijen Puri of JPMorgan believes the Indian rupee could reach 65 against the dollar much before December. In an interview to CNBC-TV18 here he said so far the government has taken serious measures to contain current account deficit only on behalf of the rupee but nothing significant has been done to check the oil, fertilizer, coal, iron prices.
To contact the author, email to editor@americanbazaaronline.com