Mumbai, Sept. 3: Stocks and the rupee plunged today with the jittery markets reacting violently to reports that a ballistic missile had been launched in the Mediterranean Sea where a flotilla of US destroyers has assembled awaiting orders from President Barack Obama to attack Syria.
Rumours swirled on the Street that two missiles had been launched. Later, Israel confirmed that it had carried out a joint missile test with the United States in the area.
But there was no credible explanation why the Indian markets cratered — with the Sensex sinking 651 points, or 3.45 per cent even as the rupee tumbled below 68 against the dollar — when the rest of the world treated the episode as just another rumble in a trading day. Key indices in China, Hong Kong, South Korea, Japan and Taiwan firmed up while European markets were marginally lower.
The Indian markets were spooked by the prospect of another US attack on the Gulf and the impact that it would have on oil prices and the fallout that this would have on the stuttering Indian economy.
The benchmark index, which started above the 19000 mark and stayed in the green initially, began to crack after noon with the precipitous fall occurring a little while later. The Sensex closed at 18234.66, a decline of 651.47 points. The drop was the sharpest since August 16, when it fell 769 points, or 3.97 per cent. It was the first loss after four sessions of gains, during which it added 918.05 points.
As a result, investor wealth worth Rs 1.61 lakh crore was eroded. The rupee opened weak at 66.29 to the dollar. It fell to an intra-day low of 68.27 before recovering to close at 67.63, down 163 paise, or 2.47 per cent.
Sentiment was also affected by Standard & Poor’s reiteration that there was a one-in-three chance that India’s credit rating would be downgraded.
Meanwhile, Goldman Sachs joined the downgrading bandwagon, sharply cutting India’s GDP forecast to 4 per cent from 6 per cent for 2013-14 and to 5.4 per cent from 6.8 per cent for 2014-15. Earlier, Nomura and HSBC had also cut their growth forecasts for India.
India imports 80 per cent of its crude oil requirements. The hardening of crude oil prices will require a concomitant increase in petrol and diesel prices.
But there are apprehensions that the government will be reluctant to raise fuel prices sharply in an election year which could lead to a ballooning of the fiscal deficit target of 5.1 per cent of GDP in the budget.
The target is already under strain after the passage of the Food Security Bill, which will raise the food subsidy to Rs 1.3 lakh crore from the budgeted Rs 90,000 crore.
Higher crude oil prices will also push up inflation, wrecking the possibility of an interest rate cut by the RBI which many believe is critical to kick start the Indian economy.
Experts here said the magnitude of the fall in India was greater because of the challenges it faces.
“In the first place, we have a government that is not taking any serious reform measures in an election year. Then there is a serious threat of a downgrade, not to mention other problems such as fiscal deficit and current account deficit,” said an analyst with a domestic brokerage.
“The economy’s fundamentals in the near-term remain on shaky ground. Increase in oil prices because of the Syria situation is expected to add to the current account burden, keeping the rupee under pressure. As a result, hopes of quick reversal of interest rate hikes by the RBI are waning, and the GDP and earnings growth outlook for 2013-14 continue to have a downside,” said Vaibhav Agrawal, vice-president (research) at Angel Broking.
Developments at the forex market (both feed into each other) where the rupee again breached the 68 mark also had an impact on stock values.