Worries over capital control, improved U.S. jobs data the principal triggers

On a “Black Friday’, there was virtual mayhem on the Street with the stocks tumbling and the rupee searching a new low. The rupee went past the 62-mark to hit a fresh intra-day low of 62.03 a dollar, prompting investors to hurriedly sell their bluest of blue chips.

The release of improved U.S. jobs data was the principal trigger for the ‘double market fall’.

Sensex tanks

The Bombay Stock Exchange (BSE) 30-share sensitive index (Sensex) tanked 769.41 points or 3.97 per cent to close at 18,598.18. After straying into 62, the rupee closed at 61.65/66 a dollar compared to 61.43/44 on Wednesday. On the National Stock Exchange (NSE), the 50-share Nifty closed at 5507.85 with loss of 234.45 points or 4.08 per cent.

A worried Finance Minister P. Chidambaram did try to talk up the rupee. He expressed the hope that calm would return to the markets.

Consumer durables

Consumer durables were the worst hit, with a fall of 8.38 per cent, followed by realty 6.07 per cent, metal 5.56 per cent, banks 5.55 per cent, capital goods 4.98 per cent, oil & gas 4.79 per cent and PSUs 4.67 per cent.

Among the broader indices, BSE-100 dipped by 4.09 per cent, BSE-200 3.92 per cent and BSE-500 3.80 per cent.

BSE’s mid cap stocks were down by 2.71 per cent, and the small cap by 2.15 per cent.

“The rupee’s historical fall to 62 versus the US dollar today goes hand in hand with the 700 point Sensex drop; both are, undoubtedly, re-reinforcing each other’s falls,” said Raghu Kumar, Co-founder of RKSV, a leading broking firm. “Seeing the fall of the rupee to new lows, traders booked profits by massively selling shares across all industries. Furthermore, to make matters worse, the fall in the equity markets has prompted banks and importers to buy dollar, further weakening the rupee,” Mr. Kumar added.

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 current account deficit (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 surprised the markets.

“It seems the government is running out of options on how to control the downward fall of the rupee,” he said.

“Markets capitulated today after showing strength early this week. It started on a soft note on weak global cues but fell suddenly and sharply on continuing concerns over the depreciating rupee and tapering of the monetary stimulus by U.S. Federal Reserve,” said Dipen Shah, Head of Private Client Group Research, Kotak Securities.

The bear-grip was so fierce that none of the sectoral indices on the Bombay Stock Exchange ended in positive terrain. Interest rate-sensitive stocks were the worst hit after July inflation came in at a higher-than-expected 5.79 per cent, virtually ruling out a policy rate cut, said Amar Ambani, Head of Research, India Infoline.

Sentiment took another hit after Moody’s downgraded the credit assessment of three banks - Bank of Baroda, Canara Bank and Punjab National Bank.

Mr. Ambani said that international cues would give further direction to the Indian markets. In the US, the Federal Reserve would release minutes of the FOMC meeting next week.

"Indian Rupee depreciated sharply to a record low in spot market as the effectiveness of the steps taken by RBI to check gold imports and to constrict capital outflows remain in doubt, and the investor fraternity seems to be unconvinced with the same,” said Sugandha Sachdeva, Assistant Vice-President & Incharge- Metals, Energy & Currency Research, Religare Securities Ltd. Traders felt that capital restrictions could hurt profitability of companies and would not be able to bring in the foreign investments required to bring down high CAD. These measures would rather keep foreign investors at a distance from India. Moreover, they might hurt more at this point of time as the probable tapering of the U.S bond buying programme was already creating uncertainty and leading to FII outflows from emerging markets, she pointed out.

There have been net foreign outflows of $11.6 billion from Indian debt and equities since late May. 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. “These numbers could not provide much needed respite to the local unit,” Ms. Sachdeva added.

Keywords: BSENSESensexNiftyUS Fed stimulus

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