BSE benchmark closes 526 points down

Stock indices tumbled by more than 500 points on Thursday as the bluest of blue chips dipped on bourses following the U.S. Federal Reserve’s announcement that it could begin slowing its QE (Quantitative Easing) stimulus .

Even though the Federal Reserve maintained that it would keep purchasing $85 billion worth of bonds every month, Fed Chairman Ben Bernanke said that it might scale back the asset-purchase programme by the end of 2013 and wrap it up in 2014, in case economy continued on the growth trajectory as the Federal Reserve increased its expectations of U.S. GDP (gross domestic product) growth for 2014 to 3-3.5 per cent.

The Bombay Stock Exchange (BSE) 30-share sensitive index, Sensex, tumbled by 526.41 points or 2.74 per cent to close at 18719.29. It touched a low of 18687.19 intra-day.

Realty stocks were the worst hit with a fall of 5.18 per cent followed by metal 4.63 per cent, banks 3.98 per cent, power 3.29 per cent , oil and gas 3.06 per cent, capital goods 2.94 per cent and PSUs 2.76 per cent.

On the National Stock Exchange (NSE), 50-share Nifty closed at 5655.90 with a loss of 166.35 or 2.86 per cent.

“The Fed’s less than dovish statement of ‘moderating asset purchases, that is, Quantitative Easing3’ by mid-2014 was a negative surprise, and, expectedly, has not been taken positively by the emerging markets, including India,” said Ramanathan K., Executive Director & CIO, ING Investment Management.

Any move that indicates reduction in global liquidity has possible ramifications on FII (foreign institutional investment) inflows at a juncture when the country can afford it least (due to high current account deficit). This has led to further depreciation in the value of the rupee versus the dollar, and has implications for CAD (current account deficit), inflation (landed cost of imports) and fiscal deficit (higher oil subsidies).

“This would also postpone expectation of further easing by the RBI resulting in higher bond yields. At present, apart from a short-term pullback, we do not see any major triggers that would drive the markets significantly higher over the next 3-6 months,” said Mr. Ramanathan.

Vulnerability in CAD led to weakness in currency and this prompted the FIIs, who were driving the market, to sell in the market. As U.S. Fed would reduce the economic stimulus over a period, the market will start reacting in anticipation. “However, withdrawal of QE over a period should put a downward pressure on commodity prices, including oil that would profit a country like India in the medium-term. In the short-term, all markets may be impacted negatively,” said Prateek Agrawal, Chief Investment Officer, CIO, ASK Investment Managers.

The rupee fell sharply in the foreign exchange market on Thursday to close at a historical low of 59.57/58 as compared to its previous close of 58.71/72. It also recorded its lowest intra-day fall at 59.98 a dollar, breaching its previous record low of 58.98 (intra-day) touched on June 11.

The rupee slumped to an all-time low against the dollar reacting on the US Federal Reserve’s announcement that it would be slowing down the bond purchase programme during the year.

“The rupee has been under pressure since last month, and has lost around 10 per cent during this period on the back of heavy foreign currency outflows as foreign investors withdrew heavily from the debt market and also from the equity market,” Kuntal Sur-Director, KPMG in India.

“The ballooning current account deficit and cloudy outlook of reforms have added to the local currency’s woes. Outlook of the currency is expected to remain weak till the structural measures are taken to improve CAD and sentiments of foreign investors,” Mr. Sur added.

“We expect the downtrend in rupee to continue in the coming days, and it is likely to depreciate further towards the 61-mark, which is the next logical support for the local currency,” said Sugandha Sachdeva, Assistant Vice-President and in-charge-metals, energy and currency research, Religare Securities Ltd.

“The dollar has been strengthening against a basket of countries with high current account deficits on improving U.S. economic data ,” said Amar Ambani, Head of Research, India Infoline.

More In: Markets | Business