The equity markets have witnessed a free-fall with indices losing over 1,000 points in three sessions. It’s news. But why is it happening? On the face of it, profit booking and re-investment elsewhere could be plausible reasons for the massive sellout in the last three days. But that may not necessarily be the end of the story given that economic fundamentals have not changed even a wee bit. In fact, if RBI projections suggest that the gross domestic product (GDP) growth would touch 7.4 per cent, inflation declined to 2.7-3.3 per cent in H2FY19 and vegetable prices are getting into the negative territory. All these prints should have enthused the markets and counters across should have reported a firming up in prices. On the contrary, the sell-off seen in three consecutive days was broad-based and secular. For instance, 29 of the 30 stocks in the BSE Sensex were routed, while 46 of the 50 in the Nifty saw a huge fall in a market that witnessed over 572 points crash.
Arrest of Huawei Technologies chief financial officer Meng Wangzhou, daughter of founder Reng Zhengfei, in Vancouver by Canadian authorities has been cited as a reason for markets taking a big dip in both the US and Asia. But it’s not just the technology counters that witnessed the crash. Here again the markets bled heavily with the belief that the US-China tensions may erupt again and extend to the technology space and markets. Only the other day, Chinese president Xi Jinping and his US counterpart Donald J Trump met in Bueno Aires, Argentina’s capital, to clear the air, bury the hatchet and work out solutions to bilateral trade issues. Huawei CFO’s arrest was apparently made citing violation of American sanctions and he was extradited to the US. Reports that presidents’ aides from both China and the US had a word on the arrest suggest a wider distrust between two sides.
RBI’s procrastination on interest rates reduction, opening a separate liquidity window for NBFCs and housing finance institutions, calling it truce with the government could have also contributed to the weak sentiments in the domestic market. Though the bond market initially perked up as RBI decided to continue buying the government paper till March, it also lost the initial momentum seen on Wednesday. This only drives home the point that liquidity issues may have to be dealt with more seriously setting aside Viral Acharya’s justifications for inaction.
Re-firming up of the rupee against the dollar at 71 plus is yet another area of concern for investors who were trigger-happy with huge correction in foreign exchange markets during the last few weeks. Equity and debt markets have historically looked at the rupee for hints on possible weakness on the external front.
Coupled with the rupee experiencing huge depreciation, reports suggesting that Opec may slash output and Qatar may quit the oil exporters’ lobby must have unsettled the markets. This is bound to have impact on macro-financials of several developing countries. India is no exception to this event as about 75-80 per cent of crude is imported from west Asian and far-eastern sources. Also, the current account deficit of India is well on its way to touch the 3 per cent mark. Thus, a combination of factors seems to have turned investors edgy while foreign investors are on a profit-booking spree targeting to re-enter the market at much lower levels next year. By then, the outcome of elections to five legislative assemblies would also be known and investors would be drawing their road maps to utilise funds in a year that would witness the general elections by May.
This week has been wild and there’s still a way to go before it is over.