Mumbai, Aug. 16: The sensex plunged 769 points today, recording its biggest fall in two years, and the rupee sank to another all-time low as global markets swooned on fears that the US Federal Reserve would start winding down its economic stimulus programme sometime next month.
The bourses swept aside evidence of an upturn in the US economy and instead chose to interpret it as a sign that the Fed would scale back its bond-buying blitz. The US central bank has been buying bonds worth $85 billion a month, funnelling cheap money into the farthest corners of the globe.
The slide on Dalal Street was accentuated by the Reserve Bank of India’s decision on Wednesday to re-impose capital controls on resident Indians and companies to stem the outflow of dollars in a bid to prop up a floundering rupee.
The gameplan didn’t work.
Spooked by fears of greater capital controls, the foreign institutional investors (FIIs) dumped stocks and set off a landslide. As a result, investor wealth worth Rs 2.2 trillion was wiped out at the end of a frenzied day of trading.
The stock slump had a rub-off effect on the rupee, which plummeted to a record intra-day low of 62.03 to the dollar, before closing at 61.65.
The collapse in the stock and forex markets ignited gold — widely regarded as a safe haven in times of trouble —with 24 carat soaring to Rs 31,160 on the Calcutta market.
Finance minister P. Chidambaram tried to soothe the frazzled nerves on the Street by saying that the fundamentals of the Indian economy hadn’t changed. He expected the jittery markets to calm down after the gut reaction to global developments had played itself out. “We have taken a number of measures. Now, let us wait for the first quarter growth numbers,” he said.
The Reserve Bank also tried to allay fears with officials saying the central bank was not contemplating any capital controls to stop FIIs from pulling money out of the country.
Foreign investors have so far put in excess of $12 billion into domestic equities this calendar year. While they haven’t been large sellers this month, provisional data from the exchanges showed they sold stocks worth Rs 563 crore today.
“The FIIs mainly hold index stocks. Even a small, $3-4 billion outflow is sufficient to wipe out 10 per cent of the index’s value,” warned Vijay Kedia, director of Kedia Securities Pvt Ltd.
The stock market had turned edgy in the morning after it interpreted the drop in US jobless claims to its lowest level since 2007 as a sign that the Fed would start turning off its cash spigots, ending the flow of funds into emerging markets like India.
“This is a perfect instance of a bear market, where a single day’s fall has overshadowed the bounce we saw in four previous trading sessions,” said Shardul Kulkarni, senior technical analyst at Angel Broking.