Indian markets were caught in a global selloff on Wednesday as hardening crude oil prices and supply chain bottlenecks stoked fears of rising inflation crimping economic recovery around the world. A depreciating rupee, which plunged 54 paise against the dollar, added to the woes.
Snapping its two-day winning run, the 30-share BSE Sensex slumped 555.15 points, or 0.93 per cent, to close at 59189.73. Similarly, the broader NSE Nifty tumbled 176.30 points or 0.99 per cent to 17646.
“Weak global markets, which resulted in profit booking in metals and IT stocks, led domestic indices to trade in the red, trimming its early gains. Spike in crude prices is spooking the Indian market while inflation is affecting US bond yields,” said Vinod Nair, head of research at Geojit Financial Services.
S. Hariharan, head-sales trading, Emkay Global Financial Services, said the global backdrop is worrisome with surging energy prices, slowing demand conditions and a global supply chain crunch across basic materials.
“Should central banks respond to rising inflation expectations by paring bond purchases and tightening monetary conditions, that could act as a trigger for sudden re-pricing of risk assets,” he added.
Rupee, bonds feel heat
Rupee and bonds continued to feel the heat of firm crude oil prices, with the domestic currency witnessing its biggest single-day drop in six months, and yields on the benchmark 10 year bond rising to an 18 month high.
The rupee on Wednesday came close to the 75 per dollar mark as international crude prices went past $83 per barrel (though it dropped later), stoking concerns about its impact on inflation and India’s current account deficit.
At the inter-bank foreign exchange market, the rupee opened at 74.63 and touched a day’s low of 74.99 against the greenback. It finally settled at 74.98 to a dollar, down 54 paise over its previous close. This was the lowest closing for the rupee since April 23 this year.
“The rupee weakened against the dollar on Wednesday because Brent crude moved near three-year highs, which prompted some banks to buy dollars on behalf of oil marketing companies. The dollar also rose against major currencies as investors turned their focus to non-farm payrolls report in the US for September, due on Friday, for cues on when the US.
“Better than expected jobs data could pave the way for tapering of the Fed's asset purchases, which will weigh on the Indian rupee,’’ IFA Global said in a note.
Meanwhile, yields on the benchmark 10-year bond came close to 6.29 per cent — a nearly 18 month high. Bond yields and prices move in opposite directions. It later ended at 6.28 per cent against its previous close of 6.26 per cent.
All eyes of the bond markets are now on the monetary policy due to be announced on Friday. Though the RBI is not expected to hike the policy repo rate and maintain its accommodative stance, it could take steps to mop up some of the surplus liquidity. The market is also expecting the central bank to come up with a roadmap on normalising the excess liquidity.