Fed spooks global markets, but Dalal Street fares better

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Sensex slips to 10-week low on F&0 expiry

Fed spooks global markets, but Dalal Street fares better
The Indian stock market fell for the consecutive fifth session to a 10-week low on Thursday, but still did better than other emerging markets, which saw a wave of selling triggered by the US Fed decision to cut the monthly buying of bonds by another $10 billion. The buying will now be limited to $65 billion a month.

As widely expected, the Fed decided to cut the stimulus buying, just as it had by a similar amount in a December decision which reduced the monthly bond purchase from $85 billion to $75 billion.

On a volatile day, the Sensex closed at 20,498.25, down 149.05 points, or 0.72 per cent. The Nifty closed at 6,073.70, down 46.55 points, or 0.76 per cent. The Sensex hit an intra-day low of 20,349, and the Nifty’s lowest on the day was 6,029 levels. Banking stocks such as SBI, ICICI Bank and Axis Bank saw big erosions.

One reason for the volatility was the expiry of the January series contracts on the day. Settlement days tend to be volatile. Since the expiry came in the midst of the earnings season, higher volatility marked trading in interest rate sensitive stocks. Some of them gai­ned due to short covering, but other banks came under tremendous pressure.

The rupee closed at 62.56/57 compared with 62.41/42 on Wednesday. It moved in the wide range of 62.55 to 62.90, according to Reuters.

Other emerging market currencies did worse. The Brazilian real dropped to a five-month low, the Turkish lira lost 1.5 per cent even after a rate hike there, the South African rand fell by 3 per cent and the Indonesian rupiah was set for second weekly declines.

India’s government came out with a statement to soothe investor nerves, saying the US Fed decision on tapering should not surprise local markets. “The decision was expected and should not in any way surprise or affect the Indian markets. However, it may be noted that $65 billion is not a small sum and will continue to infuse a large amount of liquidity into world markets,” a finance ministry statement in New Delhi said.

“As the government has stated earlier, India’s economy is better prepared for the consequences, if any, of the taper. We have added to our foreign exchange reserves which stand at $295 billion. FDI and FII inflows continue to be robust, liquidity is comfortable, stronger regulations are in place in the capital market, the investment cycle appears to have turned positive, credit demand in key sectors is strong, and wholesale price inflation has moderated,” the statement said.

The Turkish lira, Brazilian real, Indian rupee, Indonesian rupiah and South African rand have earned the collective nickname ‘Fragile Five’ on Wall Street due to their recent volatility. Foreign investors are pulling out money from countries following the taper.

After eight years in office, the chairman of US Federal Reserve Ben Bernanke is stepping down on January 31. His successor Janet Yellen will take the reins on Saturday.

“Global liquidity is coming off as US continues with the taper. Our market has had a volatile day’s trading also due to F&O (futures and options) expiry,” said Jagannadham Thunuguntla, chief strategist and research head of SMC Global Securities.

Other analysts said countries that had benefited from the liquidity slush following the US stimulus would now face a reverse fund flow, unless they tighten their current account deficit and fiscal deficit.

On the day FIIs sold Rs 430.20 crore worth of stocks; the day before they had sold over Rs 2,000 crore worth of bonds on Wednesday. Thursday’s bond selling figure will be known only on Friday.

“What we need to closely watch is how the rupee fares,” said Paras Bothra, vice-president of equity research at Ashika Stock Broking. A weakening of the rupee would impact equity market sentiment as well, he said. He also saw an upside for Nifty from the current levels.

When Raghuram Rajan came as RBI governor, he took several steps, including attracting dollars through the FCNR(B) route. The government also increased duties on gold imports. This helped the rupee to hold relatively firm compared to other emerging market currencies, Bothra said.

Steps taken by RBI and the government have resulted in an inflow of $34 billion from offshore fund raising and non-resident Indian deposit schemes, according to Reuters.

The rupee weakened on concern that Asian economic growth was slowing after a report showed Chinese manufacturing contracted, Bloomberg quoted Angel Broking as saying.

Investors sold $1.87 trillion in stocks worldwide in the week to January 27 ahead of the Fed’s decision, according to Bloomberg.

Mark Mobius, chairman of Templeton Emerging Markets Group, said inflows into developing nations would resume later this year. “People are enjoying what they see as a bull market in the US,” he said in a Bloomberg interview in Johannesburg.

“As we go forward, we’re going to see a lot of overweight positions in the US. So, given that emerging markets are still growing fast, that they have low debt- to- GDP ratios and that they have high foreign-exchange reserves, we believe that money will be flowing back again to emerging markets,” he told Bloomberg.

According to analysts, the Fed’ decision is negative for equities and riskier assets like emerging markets in two ways.

First, on a fundamental basis, buying fewer bonds means there are fewer bond investors who now have cash and face a decision on where to put it. That tightens conditions generally, and should, all else being equal, hurt investments in growing proportion to their risks, according to an analysis by Reuters.

“Second, the fact that the Fed has finally met a sell-off it doesn’t mind is significant. Not only did it pay attention to the market volatility caused by the euro zone crisis, it delayed the taper after a run-up in bond interest rates over the summer. Now, having started the taper, and seeing mixed but what it sees as update data, it seems resolved to carry on even if markets don't like it,” Reuters said.

“Specifically, a Federal Reserve that is buying less is creating tougher conditions for emerging markets, particularly Russia, South Africa and Turkey which haven't used the quantitative easing years to get their houses in order. So far, most of the damage has been concentrated on those which need to attract capital, but in recent days virtually all have been under pressure, with the notable exception of debt from some thinly traded frontier emerging markets,” it said.

(With inputs from

KR Sudhaman, New Delhi)


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