China data, U.S. Fed remarks send stocks into a tailspin

Special Correspondent
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The rupee breaches the psychological level of 56 to a dollar intra-day

Sensex tumbled 387.91 points following crash in global markets.— FILE PHOTO
Sensex tumbled 387.91 points following crash in global markets.— FILE PHOTO

Equities fell sharply on the bourses following crash in shares globally as investors rushed to grab safer assets dumping equities as manufacturing survey of China and remarks of Ben Bernanke of U.S. Federal Reserve disappointed markets.

An attempt by the Finance Minister, P. Chidambaram, to talk up the market failed to yield any results but succeeded in saving them from further fall.

The benchmark Bombay Stock Exchange (BSE) 30-share sensitive index, Sensex, tumbled by 387.91 points or 1.93 per cent to close at 19674.33. BSE Realty was the worst hit as it dipped by 5.95 per cent followed by capital goods 5.19 per cent, power 3.96 per cent, banks 2.84 per cent, PSUs 2.68 per cent, oil and gas 2.65 per cent and consumer durables 2.02 per cent.

All sectoral indices ended in the negative territory.


National Stock Exchange’s 50-share Nifty closed at 5967.05 with a loss of 127.45 points or 2.09 per cent.

Global scene

Globally, Japan’s Nikkei 225 Average was the biggest loser, with a crash of 7.3 per cent at close followed by Hang Seng with 2.5 per cent fall. In the European markets, U.K.’s FTSE lost 1.79 per cent.

“Investors are seeking haven in the greenback after China’s manufacturing activity contracted to seven-month low in May. China’s HSBC’s Purchasing Managers’ Index fell to 49.6 in May as against 50.4 in April. The contraction is on account of the fall in new orders fuelling concerns that recovery in the world’s second largest economy may slow,” said Disha Bhatt of IIFL.

On Wednesday, U.S. Federal Reserve Chairman Ben Bernanke said the economy still needed aid and premature scaling down of the bond buying programme could lead to substantial risk of slowing or ending the economic recovery. However, he was quick to add that the central bank was ready to taper its bond buying programme in the coming months provided the housing sector and labour market continued to show strong signs of growth. But the statement disappointed global markets, which was expecting an early economic recovery.

Rupee at 55.60

The rupee breached the psychological level of 56 per U.S. dollar to touch 56.01 intra-day. It closed at 55.59/60 against its previous close of 55.46/47.

It dropped below the 56-level for the first time since September 2012.

“Currency-wise 2013 would turn out to be U.S. dollar strengthening, and Japanese yen weakening, and a strong dollar never works for Asian markets, India included,” said Tirthankar Patnaik, India Strategist and Chief Economist, Religare Capital Markets.

“While we maintain our 53-55 band with temporary overshoots, weakness in the Japanese yen would force a revision, potentially shifting the band to 53-57 levels,” Dr. Patnaik added.

IIFL’s Disha Bhatt expects the rupee to head towards 60 a dollar by December-end. She cites rollback of stimulus or bond buying by the U.S. Federal Reserve and rise in dollar demand by oil importers as reasons for the dollar appreciation.

Jobs data

Europe’s nagging debt crisis and economic recovery in the U.S. are boosting dollar demand.

The U.S. economy lost 8.7 million jobs in the aftermath of the financial crisis. It has since gained back about 6.2 million jobs.

As of April, the U.S. unemployment rate was 7.5 per cent, an improvement from its 10 per cent high seen during the financial crisis.

Speculation was also rife that the Reserve Bank of India (RBI) might be buying dollars at current levels to shore up its forex reserves and might not intervene much to stem the rupee slide, said Ms. Bhatt.



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