Markets Holding On After Erratic Lows

The headwinds of tariff wars and rising oil prices have stressed out emerging markets, thereby reducing the valuation of emerging market currencies, including the Indian rupee. 

The worst seems to be over for the markets. With the markets almost scrapping the bottoms this fortnight, the only direction left for the market to go is upwards. The market was caught by surprise after the Reserve Bank of India denied the banks a much-anticipated interest rate hike during its fourth bi-monthly meet. The RBI, however, changed its stance from neutral to a hawkish ‘calibrated tightening’ mode, thereby refusing to defend the falling Indian rupee. RBI’s view to leave interest rates unchanged is also related directly to the recent NBFC debacle. A higher interest rate environment has a negative bearing on the economy in general as it increases the cost of borrowing for the industry and also for the NBFCs and banks, who are already facing a liquidity crunch. 

Naturally, the market reacted negatively to this and the benchmark index BSE Sensex fell by 5.04 per cent during the fortnight. The steepest free fall in the market was between October 1 and 5, the day the Monetary Policy Committee (MPC) left repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50 per cent. The BSE Sensex fell from 36,305.02 points on September 24 to 34,474.38 points on October 8, a fall of 5.04 per cent, while Nifty50 also mirrored the trend sliding from 10,967.40 points on September 24 to 10,348.05 points on October 8, a fall of 5.65 per cent. The Realty and Small-Cap indices saw the worst carnage with a crash of -15.06 per cent and 11.55 per cent, respectively. The Auto and Mid-Cap indices fell by around 10 per cent each. The auto stock experienced selling pressure on the back of lacklustre monthly sales data. Bankex fell the least by 1.71 per cent, while Metal, FMCG and IT fell by 7.79, 6.70, 4.39 per cent, respectively. 

In the policy meet, the RBI Governor Urjit Patel remarked that the rupee fared better than other emerging market currencies. The rupee touched a record low of Rs 74.26 per dollar. On the other hand, oil prices rose in anticipation of a reduction in crude oil exports from Iran in a run-up to the imposition of US sanctions in November. Brent crude was at US$84.17 per barrel. 

The global markets experienced stress this fortnight with all major indices showing a downtrend. Among Asian markets, Hang Seng index led the pack, falling by 4.72 per cent and the Shanghai Composite was down 2.32 per cent on fears of trade war. Major European indices DAX, CAC 40 and FTSE 100 fell by 3.27, 3.21 and 1.88 per cent, respectively, on the back of Italian budget crisis. Meanwhile, the US markets fared slightly better, comparatively. Nasdaq fell 2.56 per cent, the S&P500 was down 1.16 per cent, while the Dow Jones was down by 0.43 per cent during the fortnight.
 

The FII and DII investment data showed the recurring pattern of FIIs selling and DIIs buying. DIIs matched FIIs selling streak with their purchases on most days, expect on September 27, which was the expiry day for the month’s futures and options contract. The FIIs registered a net outflow of Rs 16,096.37 crore, whereas DIIs were net buyers to the tune of Rs 17,344.06 crore. 

Going forward, bearing in mind IMF’s downward revision of the global economy caused by constant trade war threats and increasing prices of vital commodities like crude oil, equity markets are expected to remain under stress.