The sell-off in stocks, the rupee, and bonds continued for a second day on Tuesday on fears that India’s macro fundamentals could be worsening. The widening current account deficit due to rise in oil prices, weakening rupee, and expensive valuations saw foreign portfolio investors (FPIs) pull back from domestic equities. As it is, the appeal of riskier assets has dimmed amid global trade tensions and fears of contagion due to slide in emerging market currencies.
The benchmark Sensex on Tuesday ended at 37,413, down 509 points, or 1.34 per cent, extending its two-day fall to 977 points, or 2.5 per cent. Investor wealth, measured in terms of the cumulative market value of all listed stocks on the BSE, fell by Rs 4.16 trillion in the past two trading sessions to Rs 153.24 trillion, the exchange data showed.
The Nifty ended at 11,287.5, after falling 150 points for a second day in a row. The rupee fell another 0.34 per cent to close at 72.70 a dollar from its previous close of 72.45, while the yield on the benchmark government bonds rose another three basis points to 8.18 per cent.
“There is a spike in global volatility. Most emerging market equities and currencies are falling. We shouldn’t be surprised by a little bit of volatility. We have always maintained that the markets can see a pullback of 5 to 10 per cent easily,” said Rashesh Shah, chief executive officer, Edelweiss Group. “We have had it fairly good for the past 18 months. We shouldn’t be unduly concerned. Our benchmark indices are down only 3-4 per cent from the peak,” he added.
FPIs on Tuesday sold shares worth Rs 14.5 billion, taking their one-month sell-off to Rs 65 billion.
“Given the higher interest rate environment and weakening macroeconomic fundamentals ahead of the elections, we believe the equity market could see some de-rating in the near term,” said Jitendra Gohil, head of India equity research, Credit Suisse Wealth Management.
Less-than-expected GST collections, concerns on the government’s ability to meet the fiscal deficit targets, the rupee dropping to a record low, and rising oil prices are weighing on the macro, said the wealth management firm.
On a year-to-date basis, the rupee is the worst-performing currency in Asia, falling 12.14 per cent against the dollar.
“A further 3-4 per cent up move in USD/INR cannot be ruled out over the next three-four months if panic in emerging markets continues,” wrote IFA Global, a currency consultant, in a note.
HDFC Bank chief economist Abheek Barua had said the rupee slide should be taken as a crisis. Axis Bank Chief Economist Saugata Bhattacharya also wrote in a note that letting the rupee find its own level was perhaps not the right approach.
“Unfortunately, financial markets, particularly forex markets, are prone to overshooting, and sharp moves can create multiple problems for companies, particularly liquidity,” Bhattacharya said. The 10-year bond at 8.18 per cent is at its highest level in more than four years. The spike in yield indicates that interest rates have gone up in the economy already. The RBI, in this case, will have to hike rates to catch up with the curve, said experts. The Sensex is down 3.8 per cent from its peak touched last month. However, the index is still up 9.9 per cent on a year-to-date basis.