The Sensex concluded the worst week in its history, shedding almost 2,000 points and wiping out investor wealth worth Rs 6.6 lakh crore in just four trading sessions. Unfortunately, there are enough ominous signs to suggest that there might be worse to come.These include the dismal 1.3% rise in industrial production in August over the same period last year; the continued pressure on the rupee, which hit an alltime low of 49.30 in intra-day trading; a crisis of confidence which has turned banks wary of lending to each other (just as in the West), sending overnight call rates soaring to as high as 22%; and the continuing travails of the Dow, which plunged by nearly 700 points during early Friday trading. As fears of a global recession mounted, oil prices fell to $75 a barrel. With market fears taking on the dimensions of a perfect storm, a concerned finance minister cancelled his scheduled trip to Washington. P Chidambaram was to attend informal meetings before the IMF World Bank plenary and participate in the discussions of finance ministers of G20 countries on the global financial crisis. However, sources said he decided that he needed to be available in India to tackle any situation arising out of the ripple effect of the crisis.One cause of concern could be the IIP figures, which rudely interrupted a brief sensex recovery and sent the 30-scrip index plummeting again to close 801 points or 7% lower, its seventh biggest singleday loss in history. The sensex was last seen at this level in August 2006. The day’s trading left investors poorer by Rs 2.5 lakh crore. Battered by speculation over the state of its finances, ICICI Bank plunged by over 25%, but concerted efforts by its top officials to reassure depositors that their money was safe helped shore up the stock a little.The efforts of the finance minister to talk up sentiment after the Reserve Bank of India cut the cash reserve ratio by another 100 basis points had helped the sensex recover partially after losing over 1,000 points within minutes of opening. It had pulled back over 600 points, as encouraging news came in of the rate of inflation dropping to 11.80% from the previous week’s figure of 11.99%. Then, the index of industrial production (IIP) data was released, and suddenly all talk of Main Street being insulated from Dalal Street seemed frighteningly hollow. Investors panicked and the market fell again to end the week at 10,528, compared to its close of 12,526 the previous Friday. The rupee plummetted to an all-time low of 49.30 against the dollar before closing at 48.72, still at a five-year low. In the morning, investors were greeted by news that world markets had once again tumbled following another beating for the Dow on Thursday. The Dow fell 678 points to close at 8,579, its first close below 9,000 since 2003. Japan’s Nikkei – already reeling from a nearly 10% drop on Wednesday – slumped another 9.6% on Friday. Hong Kong’s Hang Seng fell 7.2%, while the Sydney index closed 8.3% lower. The Indonesian stock exchange suspended trading for a third day and the Bangkok exchange halted trading after shares fell more than 10%. In India, panicky investors bolted, and the sensex slid 9.6% to 10,240 with foreign funds once again leading the selling brigade. Domestic institutions, mainly the insurance companies, again stepped up buying to cushion the fall.
Cause & Effect HOW A FALL IN ONE MARKET TRIGGERS PANIC IN OTHERS
1 Sub-prime loan defaults and mortgage failures in US create crisis of confidence .The bloodbath on Wall Street hits financial services firms the hardest. Even cash-rich banks are scared of lending money (to other banks and to corporates) following Lehman shutting shop over a weekend and some European banks suddenly going bust. Result: severe liquidity crunch.
2 With banks preferring to hoard cash, lines of credit to corporates are drying up. In the US, even working capital is now scarce, affecting payments to employees and suppliers and stalling ongoing projects, leading to bankrupcy fears. And with worried consumers cutting back on spending, fears have spread of a global recession as many countries depend on exports to US.
3 Contagion travels from Wall St to stock markets around the world. Indian markets hit as well as FIIs sell heavily to meet liabilities of parent companies. It also impacts industry as corporates find it difficult to raise money.
4 To send back money, FIIs need to convert rupees into dollars. Reports also indicate that Indian banks are buying dollars at home to keep their foreign operations afloat since no one in those credit-starved markets is willing to lend to any bank. Since dollar-rupee exchange rate is a function of demand supply, rush for dollars means those buying the currency have to pay more in terms of rupees for every dollar. As a result, rupee depreciates to all-time low of 49.30 per dollar during intra-day trading on Friday. RBI has tried to shore it up by increasing supply of dollars through sales, thus withdrawing rupees from the system. But that reduces rupee supply, adding to the liquidity crunch .
5 RBI’s strategy has been to cut cash reserve ratio—the minimum portion of deposits that banks are required to keep with the central bank—thus releasing money into the system. Clearly, ensuring liquidity is now a greater concern with RBI than fighting inflation Global Gloom. FIIs selling crosses $10bn mark The fightback was led by the RBI. It had taken the central bank over five years, after June 2003, to announce a CRR cut on Monday. But the next cut didn’t take even five days. The RBI followed up its 50 basis points cut on Monday by slashing another 100 basis points, bringing CRR down to 7.5% in a move that is expected to pump Rs 60,000 crore into the system.Enter the finance minister. P Chidambaram had a flight to catch – to Washington, to attend the meetings of the IMF-World Bank and G-20 leaders on the global crisis. But he first issued a statement, through finance secretary Arun Ramnathan, in a bid to address the domestic situation. He announced that he was setting up a group consisting of top bankers, headed by the finance secretary, to make a quick assessment of liquidity requirements and advise the government accordingly.“Credit is the lifeline of trade, commerce and business and, hence, it is important that credit continues to flow to all sectors of the economy. In consultation with RBI and other regulatory authorities, government will address the liquidity and other concerns about the economy,” Chidambaram said. “It is also important to maintain our confidence in the Indian economy. As the Cabinet noted on Wednesday, the fundamentals of our economy are strong and there are many indicators which affirm the sound fundamentals,” he added. That cheered investors for a while, as did a Sebi assurance. In the background, the government reportedly also asked insurance companies to buy frontline stocks. Institutional dealers said this helped to assuage panic in the market and the sensex recovered substantial ground, till the IIP data came along. By close, Reliance Comm lost 21% to close at 237, ICICI Bank closed 19.7% lower at Rs 364 while Reliance Infra shed 19.3% to Rs 515. Of the 30 sensex stocks, 28 ended in the red while only two – SBI and Ranbaxy – ended higher. FIIs again led the selling spree, with provisional data showing a net selling of Rs 2,500 crore while domestic institutions were net buyers at Rs 1,745 crore. Sebi data showed that net selling by FIIs for 2008 had crossed the $10 billion mark.
Cause & Effect HOW A FALL IN ONE MARKET TRIGGERS PANIC IN OTHERS
1 Sub-prime loan defaults and mortgage failures in US create crisis of confidence .The bloodbath on Wall Street hits financial services firms the hardest. Even cash-rich banks are scared of lending money (to other banks and to corporates) following Lehman shutting shop over a weekend and some European banks suddenly going bust. Result: severe liquidity crunch.
2 With banks preferring to hoard cash, lines of credit to corporates are drying up. In the US, even working capital is now scarce, affecting payments to employees and suppliers and stalling ongoing projects, leading to bankrupcy fears. And with worried consumers cutting back on spending, fears have spread of a global recession as many countries depend on exports to US.
3 Contagion travels from Wall St to stock markets around the world. Indian markets hit as well as FIIs sell heavily to meet liabilities of parent companies. It also impacts industry as corporates find it difficult to raise money.
4 To send back money, FIIs need to convert rupees into dollars. Reports also indicate that Indian banks are buying dollars at home to keep their foreign operations afloat since no one in those credit-starved markets is willing to lend to any bank. Since dollar-rupee exchange rate is a function of demand supply, rush for dollars means those buying the currency have to pay more in terms of rupees for every dollar. As a result, rupee depreciates to all-time low of 49.30 per dollar during intra-day trading on Friday. RBI has tried to shore it up by increasing supply of dollars through sales, thus withdrawing rupees from the system. But that reduces rupee supply, adding to the liquidity crunch .
5 RBI’s strategy has been to cut cash reserve ratio—the minimum portion of deposits that banks are required to keep with the central bank—thus releasing money into the system. Clearly, ensuring liquidity is now a greater concern with RBI than fighting inflation Global Gloom. FIIs selling crosses $10bn mark The fightback was led by the RBI. It had taken the central bank over five years, after June 2003, to announce a CRR cut on Monday. But the next cut didn’t take even five days. The RBI followed up its 50 basis points cut on Monday by slashing another 100 basis points, bringing CRR down to 7.5% in a move that is expected to pump Rs 60,000 crore into the system.Enter the finance minister. P Chidambaram had a flight to catch – to Washington, to attend the meetings of the IMF-World Bank and G-20 leaders on the global crisis. But he first issued a statement, through finance secretary Arun Ramnathan, in a bid to address the domestic situation. He announced that he was setting up a group consisting of top bankers, headed by the finance secretary, to make a quick assessment of liquidity requirements and advise the government accordingly.“Credit is the lifeline of trade, commerce and business and, hence, it is important that credit continues to flow to all sectors of the economy. In consultation with RBI and other regulatory authorities, government will address the liquidity and other concerns about the economy,” Chidambaram said. “It is also important to maintain our confidence in the Indian economy. As the Cabinet noted on Wednesday, the fundamentals of our economy are strong and there are many indicators which affirm the sound fundamentals,” he added. That cheered investors for a while, as did a Sebi assurance. In the background, the government reportedly also asked insurance companies to buy frontline stocks. Institutional dealers said this helped to assuage panic in the market and the sensex recovered substantial ground, till the IIP data came along. By close, Reliance Comm lost 21% to close at 237, ICICI Bank closed 19.7% lower at Rs 364 while Reliance Infra shed 19.3% to Rs 515. Of the 30 sensex stocks, 28 ended in the red while only two – SBI and Ranbaxy – ended higher. FIIs again led the selling spree, with provisional data showing a net selling of Rs 2,500 crore while domestic institutions were net buyers at Rs 1,745 crore. Sebi data showed that net selling by FIIs for 2008 had crossed the $10 billion mark.
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