Mumbai, Aug. 17: Investors were badly bruised on Friday as weak cues from other markets and a bout of panic selling sent the BSE sensex off a cliff.
The bellwether index has traced the jagged features of a hilly terrain all week — shoulder, saddles and valleys. Today, there was an escarpment within 10 minutes of the start: a perilous plunge of 578 points that saw it sink below 14000 by noon, which meant that it had lost a 1000-points since scaling the 15000-peak just 29 trading sessions ago.
It did manage to claw back from its depths to close with a loss of 216 points over its previous close due to short-covering even as European indices opened in the green.
But the big news late on Friday was the decision by the board of the US Federal Reserve to cut the discount rate by 50 basis points to 5.75 per cent — marking it the first cut in US borrowing costs since Ben Bernanke took over as Fed chairman.
The rate cut will pare the cost of direct loans to banks and shovel cash into the US market, thereby easing fears of a global credit squeeze.
The discount window is an instrument of monetary policy that allows institutions to borrow money on a short-term basis to meet temporary shortages of liquidity.
The Fed move sparked a 150-point surge in the the Dow Jones industrials at the time of going to press and European markets also bounced back strongly. Analysts reckoned that the move would have a positive impact when the markets reopen on Monday.
It may be recalled that a major fallout of the sub-prime crisis in the US mortgage market, has been a squeeze on the availability of credit. While the Federal Reserve has pumped billions of dollars as liquidity into the banking system recently, its discount rate cut is seen as a move to calm global financial markets.
“The discount rate cut will improve sentiments in the US markets and it will be beneficial for our markets as well. There is a chance of revival next week and we could see some upside,” said V. K. Sharma, head of research at Anagram Stock Broking.
Earlier, the markets seemed set to do a repeat of Thursday, when the BSE sensex slipped to an intra-day low of 13779.88 after opening weaker at 14309.37. The day’s low marked a drop of more than 1200 points from the 15000-mark that was scaled in July this year. The fall in the market was most savage at mid-session on reports of a fall in the Hang Seng index and Japanese stocks due to further unwinding of Yen Carry Trades.
However, there was a reversal because of short-covering even as a turnaround was observed in other Asian indices as well. Moreover, stocks at London opened in the green.
The sensex later ended at 14141.52. Though this meant a fall of 216.69 points, it also marked a recovery of over 360 points.
Brokers note that though the Indian markets will track other global indices, in a worst-case scenario, there can be further correction from the present levels.
“The correction may be in the last phase,’’ an analyst with a foreign brokerage said.