The Telegraph
Friday , January 31 , 2014

Ben inflicts stock pain

Mumbai, Jan. 30: The widely anticipated decision of the US Federal Reserve to scale back its stimulus programme by another $10 billion sent the Sensex hurtling to a two-month low even as the rupee lost 15 paise of its value against the dollar.

In his final meeting as the Federal Reserve chairman, Ben Bernanke announced a reduction in the Fed’s bond-buying programme to $65 billion in February. Many pundits believe that the US central bank will trim its bond purchases by $10 billion at every meeting of the Federal Open Market Committee (FOMC) henceforth, starting the middle of March to the middle of September and completely wind down the programme by a final $15 billion in October.

It’s this wind down schedule — rather than the $10 billion cut in February — that triggered fears that foreign inflows to emerging market economies such as India would be badly hit for the greater part of this year.

The bad news didn’t end there. Reports from China showed that manufacturing in the world’s second largest economy had contracted for the first time in six months, sparking fears of a slowdown there.

Capital market circles said that amid such weak global cues, stock prices came under pressure also on account of the expiry of the January equity derivative contracts.

Late tonight, the commerce department announced that the US economy had grown at a rate of 3.3 per cent (annualised) in the fourth quarter, which came on the back of a 4.1 per cent growth rate in the third quarter. This is the biggest back-to-back increase in the US economy since the end of 2011 — and will be another reason why foreign investors will plough money into the US rather than the emerging markets as the American economy moves into high gear.

The Sensex opened lower at 20491.74 and continued to lose momentum to hit an intra-day low of 20343.78, down by over 300 points. However, some buying at the fag end helped it recover from the lows and close at 20498.25 — a drop of 149.05 points, or 0.72 per cent, from Wednesday’s close.

Indices in Hong Kong, China, Singapore and Japan fell in the 0.48 per cent to 2.45 per cent range. Europe was also trading lower in early trade as the bellwether indices in France, Germany and UK came under selling pressure.

Amar Ambani, head of research at IIFL, said Thursday’s decline was accompanied with huge volumes as the benchmark indices recorded their fourth highest turnover at 4.46 lakh crore.

With the US central bank set to bring down its purchases further in the coming months, the spotlight will once again focus on foreign institutional investors (FIIs). Though the foreign investors have made net purchases in equities of $154 million so far this month, they have been sellers in the debt markets. Provisional data from the stock exchanges showed that the foreign investors sold nearly Rs 430 crore of stocks today.

Experts continue to remain divided over which way FII money will flow. Some expect inflows to fall to a trickle because of domestic factors such as the upcoming elections. Others, however, reckon that India is much better off than other emerging markets and it won’t be badly affected by the further tapering of the US stimulus programme.

“The corporate results announced so far have largely not been disappointing. Moreover, our current account deficit (CAD) is very much under check and interest rates have also perhaps peaked. India is a market that the FIIs cannot ignore,” said an analyst with a domestic brokerage.

On the inter-bank foreign exchange market, the rupee came under pressure as it lost by 15 paise against the dollar to end at 62.56 in line with the trends in other emerging markets as a consequence of the Fed’s decision.

The rupee opened lower at 62.90 a dollar from Wednesday’s close of 62.41. Following weak global cues, it immediately touched a low of 62.91 amid month-end dollar demand from oil refiners. However, it later recovered to a high of 62.55 on dollar selling by exporters. The currency closed at 62.56, logging a fall of 15 paise, or 0.24 per cent. In the past two sessions, it had gained 69 paise, or 1.09 per cent.

Across emerging markets, currencies including Brazil’s Real, Indonesia’s Rupiah, Philippine Peso, Turkish Lira dropped against the dollar on fears of capital outflows. The dollar index, a gauge of six major global rivals, was up by 0.32 per cent.