The Hindu Business Line : Stocks plumb new depths

New Delhi/Mumbai, Oct. 10 It never rains, it pours. For long believed to be “de-coupled” from the world economy, the Indian economy showed that it could be buffeted by the ill-wind blowing through the Western financial markets.

On Friday, the Sensex lost over 1,000 points in early trade, but recovered 200 points by the end of the day; the Index of Industrial Production (IIP) was down to only 1.3 per cent in August 2008; inflation came in at 11.80 per cent; the rupee plunged to 49.30 to the dollar but recovered to close at Rs 48.46 and forex reserves showed a decline of $7.8 billion for the week ended October 3, adding up to a total drawdown of $11.36 billion since end-August.

The Government and the Reserve Bank of India were swift to respond with measures to restore confidence. The latter announced that CRR was being cut by a further 100 basis points (over and above the 50 basis points announced on Monday). This would release about Rs 40,000 crore, in addition to the Rs 20,000 crore that the Monday cut had yielded. Both cuts come into effect on October 11, making a total cut of 150 basis points.

Bond prices gained over Rs 1.20 on news of additional liquidity infusion. The cancellation of the Rs 10,000 crore auction of G-Sec also brought cheer to the money markets.

“In about 10-12 days from today, when the supplementary grants (spending Bill) is passed, a substantial amount of liquidity will be infused into the market” the Finance Minister, Mr P Chidambaram, told a news channel.

Panel on liquidity

Soon after the RBI’s announcement on CRR cuts, the Finance Minister announced that he was setting up a Group to “make a quick assessment of the requirements of liquidity and advise the government.” The Group will be headed by the Finance Secretary, Mr Arun Ramanathan, and will submit an interim report within a week.

Reading out the Finance Minister’s statement, Mr Ramanathan, said, “The RBI Governor has assured the government that the central bank is keeping a close and continuous watch on the situation.” Earlier, the Finance Minister had delayed his departure for Washington.

On the Index of Industrial Production, the Finance Minister said it had to be viewed in the context of other things such as export, import, ability to access external commercial borrowings as well, and not in isolation. But observers were surprised at his comment .

The Finance Minister said that ”the IIP numbers are not very satisfactory. At the same time they are not very right… please remember what happened to the IIP of July. They’ve revised it upwards to 7.4 (per cent)."

The downward dip in the growth of the IIP to 1.3 per cent is largely due to the base effect. In August 2007, it had grown by 10.9 per cent.

Experts believe that it ought to get better in September to around 3 per cent. The real issue, however, they say is of what is going to happen to industrial growth over the next few months. Informed opinion is of the view that the IIP will hover between 3 and 6 per cent for the next six months, if not more.

Even as the stock market was bleeding, gold showed big gains on the domestic bourses today with a spurt of over Rs 500 for 10 grams.

Selling pressure

Tracking the global markets, the Sensex and Nifty opened sharply lower; the selling pressure was so intense that the Sensex fell by more than 1000 points in the very first few minutes of trade. At its intra-day low of 10,239, it was 1089 points below its previous close.

The RBI move provided some support to worried investors. But the mid-morning recovery that followed was snapped in a fresh bout of selling pressure around 1 p.m. Right through the rest of the trading session, the volatility could not be contained.

The index closed 800 points down at 10,527, exactly at the half way mark from its all time high of 21,206.77 on January 10, recording one of the steepest one-day declines in recent times, of 7.07 per cent.

The Nifty closed 233 points down, at 3,279falling 6.6 per cent.

The foreign institutional investors were net sellers of equities for Rs 2,514 crore while the domestic institutions were net buyers of equities for Rs 1,745 crore, stock exchange date indicated. “It’s largely a problem of the global markets and for us it just got imported. Investors are confused; long-term investors see their wealth eroding, and so investors are obviously not a in a mood to invest,” said Mr Anand Tandon, Director and Head of Equities, Brics Securities.

“The fall has been very sharp; only regulatory measures will be effective in bringing in some stability,” Mr Tandon added.

“There has been selling in equities across the globe over the last few days and it is very difficult for India to have bucked the trend,” said Mr Hitesh Agrawal of Angel Broking.

Rationale for imposing CRR