The Hindu Business Line : It is cascading effect, say brokers

IT WAS a double whammy for the markets. Did they see it coming? One could safely say they did not. While market participants did anticipate a bearish trend, the extent and severity of the fall caught them on the back foot. It was a day of huge losses and for the first time in a long while, there were market wide circuit breakers.

Margin calls were triggered following the market crash, which only added to the sell-off. Dealers said the sharp fall in prices was bound to trigger margin calls. The market-wide circuit breakers when triggered brought about a co-ordinated trading halt in the equity and equity derivative markets. The NSE and BSE suspended trading twice during the day in an attempt to cool down indices.

``Friday's fall continued with no positive announcements coming through during the weekend on Government formation. It was triggered off by short-term funds on opportunistic investments. Additionally, there were a number of overbuilt positions, apropos expectations of the BJP government. This led to a sell off in key stocks thereby leading to programmed selling. And at every fall one saw the margin calls intensify,'' Mr Rajesh Jain, CEO, P-Sec said.

According to Mr Nischal Maheswari, Vice-President, broking of Edelweiss Capital, the margin calls were backed by general selling by the foreign institutional institutions (FIIs).

``Over the last 10 days, FIIs have sold to the tune of Rs 2,500 crore. And when the market collapses, margin calls will come in, especially when a client is unable to pay. This adds to the free fall. Between Friday and Monday, money lost was around Rs 200 crore. The margin calls triggered an additional selling of Rs 500 crore - Rs 600 crore today. The global meltdown, the uncertainty caused by a Left-supported Government, all brought the markets to a crisis point. Yes, one could say there are many in the capital markets staring at financial crisis,'' he added.

In the global markets, indices like the Nikkei, Hang Seng, Strait Times and the Taiwan Weighted all tanked across the board. Mr Paresh Khandwala, CMD, Khandwala Securities, said it was an accumulation of events over the past 15 days to one week.

``Increasing global concerns over the oil price hike (oil is ruling at $41 a barrel), talk of a hike in US interest rates, coupled with the Asian market weakness and the election outcome in our own backyard, all served to bring about today's fall. Yet, FIIs cannot neglect the Indian capital market. For we have remained performer on a year-on-year basis in comparison to other emerging markets with the Sensex having given them a return of 44 per cent. However, there is no denying that today's market reaction was a little extreme. In the first 14 minutes, when the volume between the two exchanges was not more than Rs 700 crore - to Rs 750 crore, the market fell abut 10 per cent. Thereafter, after trading was suspended and the market reopened, the indices fell by another 5 per cent and this time combined volumes were around Rs 60-70 crore. This cannot happen unless there is a concerted effort to bring down the market cap. However, all one can say is that ultimately fundamentals will prevail,'' Mr Khandwala reasoned.

According to Mr Srikant Shetty of Karvy Stock Broking, the unwinding of F&O positions and the cash margin calls brought about a cascading effect. ``Individual stock futures ended at a discount to the spot prices as traders cut positions. There were no buyers in initial trades. Everybody turned seller without looking at the stock price. The liquidity crisis lent a cascading effect,'' he said.

Mr Nimish Shah, CEO, Parag Parikh, said that going forward market trend would be defined by Asian market performance and the formation of the Government. ``The sharp fall is an indicator that uncertainty is likely to continue. At least till such time, there is clarity on the common minimum programme, which in all likelihood will be in line with the swearing in of the Cabinet,'' he added.