Recovering from a deep early-morning plunge, Indian stock benchmark Sensex narrowed its losses to just 58 points after European stocks shrugged off the threat posed by the unprecedented downgrade of the U.S. credit rating.
After plunging by about 550 points earlier in the morning, the 30-share barometer index recovered most of its losses and was down only 58 points down at 17,247.87 in early afternoon trade.
Earlier in the morning, the index had fallen to as low as 16,759.45 points — the lowest since June 10, 2010.
Besides positive cues from Europe, where stock markets opened higher despite the mounting debt worries in Eurozone and the U.S., the value buying of Indian stocks at lower levels also helped the Sensex recover.
Shares like ONGC, M&M, Maruti and SBI bounced back into positive territory, while RIL, ITC, ICICI Bank and NTPC also recovered sharply from their early morning lows.
However, stocks like Infosys, TCS, Tata Motors and Tata Steel continued to reel under acute selling pressure, as export-focused sectors are likely to be worst affected by the crisis in the U.S. and Europe.
In the first day of trading after the U.S. lost its top-notch creditworthiness rating, Indian stocks fell sharply this morning, causing a plunge of 546 points in the Sensex and wiping out an estimated Rs 2 lakh crore in investors’ wealth.
However, a recovery was seen taking place in late morning trade and the Sensex recovered nearly 500-point loss by early afternoon.
Analysts said that the recovery was partly due to the impact of the U.S. downgrade sinking in among investors and also because of bargain buying -- purchases of stocks at lower levels -- by some fund houses.
A positive opening in some European markets also helped improve the market sentiment, although Asian markets recorded huge losses.
The markets in Spain and Italy opened with robust gains after the European Central Bank pledged its support for lowering their borrowing costs.
The sharp fall of Monday morning came in the first trading session after the U.S. lost its ‘AAA’ credit rating for the first time in history, as the ratings agency S&P, through the downgrading, suggested it is not convinced by the efforts being made to tackle the country’s debt problems.
Monday’s fall follows an over 1,000-point plunge in the Sensex over the last four trading sessions amid weak global cues such as mounting debt worries in the eurozone.
Investors’ wealth has been eroded by about Rs. 4 lakh crore in the past four sessions in India, while global markets lost an estimated $2.5 trillion last week.
RBI monitoring situation
Noting that India was not insulated from global developments like the downgrade of the U.S., the Reserve Bank on Monday said it was closely monitoring the situation and would continuously assess the impact on the Indian economy and financial markets.
The RBI also said the entire policy and regulatory framework of the country must be “prepared to respond to turbulent financial market conditions arising out of external developments”.
“Developments relating to the U.S. economy last week have significantly increased uncertainty about its prevailing condition,” the RBI said in a statement.
“The Reserve Bank is closely monitoring all key indicators and will continuously assess the impact of global developments on rupee and forex liquidity and macroeconomic stability. We will respond quickly and appropriately to the evolving situation,” it added.
The U.S. lost its top-notch ‘AAA’ rating this weakened and the development has further added to the worries of global markets, already grappling with the debt crisis in Europe.
“A sharp fall in US equity markets on Thursday was followed by a downgrade in the long-term U.S. sovereign rating by rating agency Standard & Poor’s from AAA to AA+ with a negative outlook on Friday,” the RBI said.
“Two other rating agencies, Moody’s and Fitch, had recently maintained their AAA rating, but suggested that this could change.
“The downgrade has raised concerns of continuing turmoil in global financial markets, as investors re-allocate portfolios in response to heightened risk perceptions stemming from both developments,” the RBI said.
The RBI further said that India was not insulated from such developments, as Friday’s market behaviour demonstrated here.
“It may, however, be noted that in the worst phase of the recent global financial crisis, the economy grew by 6.8 per cent, suggesting high resilience emerging from domestic factors.
“While downside risks to growth may have increased in the wake of global developments, they are likely to have limited impact,” the RBI said.
The RBI said its immediate priority was to ensure that adequate rupee and forex liquidity is maintained in domestic markets to prevent excessive volatility in interest rates and exchange rates.
“Rupee liquidity is being provided through the repo window of the Liquidity Adjustment Facility (LAF). As of now, the banking system does not face any liquidity pressures, as evident from the low level of dependence on liquidity injections under the LAF,” it said.
The central bank said that banking system has an adequate stock of Statutory Liquidity Ratio (SLR) securities, which are eligible for repo transactions.
“As regards forex liquidity, in anticipation of financial market turbulence related to the US debt ceiling impasse, the Reserve Bank made an assessment of the ability of the forex reserve portfolio to meet potential forex requirements in the event of significant capital outflows.
“This exercise indicated that there were sufficient liquid reserves to meet the demand for forex even in a stress scenario,” it added.