INDIA BUSINESS WORLD - MAY 2006
THE MONTH THAT WAS...

LARGEST FALL IN BSE'S 150 YEARS

   IT was the perfect storm. The Indian markets had been teetering on a knife-edge for a while. But on Thursday, the tight-rope walk ended. A convergence of global and domestic events knocked the market off the cliff and sent it crashing into the abyss. A correction had been expected for some time, but the 826-point Sensex slide left market participants reeling.

Globalisation, which has provided a flood of liquidity to the Indian capital markets, can also be painful, as many investors found out on Thursday. Fear that the abundance of dollars and yen flooding into Indian stocks would dry up because of rising interest rates in the US and other developed markets, coupled with confusion over a draft CBDT circular, on Thursday led to the largest absolute decline in the Bombay Stock Exchange's recorded history. Investors on Thursday rushed to sell their shares as if there was no tomorrow.

Fears that FIIs, the mainstay of the recent bull run in Indian equities, could pull out of the country due to high taxes, coupled with jitters from a general weakening in key Asian stock markets, pulled the benchmark Sensex down by a whopping 826 points or 6.7%, the largest single-day fall for the 150-year-old exchange.

Things were almost the same at the National Stock Exchange, where the benchmark 50-share Nifty index also fell 6.7% to 3,388.90 points. Although the government later tried to clear the confusion with finance minister P Chidambaram reaffirming that there was no move to bring foreign portfolio investors into the tax net, the assurance came a tad too late. More than Rs 225,000 crore of investor wealth had been eroded on BSE, and blue chips such as Reliance Industries and consumer goods major Hindustan Lever fell 7.5% and 6.1%, respectively. The two stocks together account for over 15% of the weightage on Sensex.

Higher-than-expected US inflation data released on Wednesday spooked global markets, including India.

THAT would mean that FIIs and hedge funds, largely based in the US, would find it less profitable to borrow in the US and invest in riskier emerging markets, like India. Rising interest rates in Euroland and Japan would have much the same effect. Indian stocks, eagerly courted by global money hitherto, could thus be less desirable, at least in relative terms.

Domestic factors didn't help either. Fears that FIIs, the mainstay of the recent bull run in Indian equities, could pull out of the country due to high taxes, coupled with jitters from a general weakening in key Asian stock markets, pulled the benchmark Sensex down by a whopping 826 points, or 6.7%, the largest single day fall ever for the 150-year old exchange. Things were almost the same at the NSE where the benchmark 50-share Nifty also fell by 6.7% to 3,388.90 points.

Although the government later tried to clear the confusion, with the finance minister reaffirming there was no move to bring foreign portfolio investors into the tax net, the assurance came a tad too late. “The Indian markets were overbought for some time and the combination of the (CBDT) circular and global factors together led to such a fall,” said DSP Merrill Lynch vice-president Andrew Holland.

The government, through the CBDT, had put out a circular on Wednesday issuing guidelines on distinguishing incomes as capital gains or business income. However, lack of adequate information on what would constitute short-term capital gains, sparked off rumours that FIIs would sell their holdings in India.

“By mid afternoon, most retail investors who had bought in the morning on hopes of a rebound in the sentiment, panicked, dumping their shares,” said Ambit Capital CEO Manish Kanchan. “This coupled with the pressures from margin calls, knocked the bottom off the index which had been precariously perched.”

Also, weak global markets, with Japan's Nikkei falling 1.3% on US interest rates concerns, also contributed to the slide. Sliding metal prices were also a concern though on Thursday, global macro factors predominated.

As per BSE provisional figures, FIIs had sold about Rs 850 crore worth of Indian securities on Thursday. The exact figure is likely to be known on Friday, when market regulator SEBI would release the information. Prominent FIIs said that a slowdown in inflows had been happening due to stretched valuations. JPMorgan recently put out an underweight stance on India. JM Financial chairman Nimesh Kampani said the government should immediately try to clear the air over short term capital gains. “There is no clear definition on what a short-terms period is...while long-term is specified as 12 months and above,” he added.