Anxiety over growth, US rate hike depresses Indian markets

Mumbai, Sep 5:

Disappointing macro-growth data, risk of a US rate hike, a weak monsoon, the slowdown in China and Europe’s cautious approach on the world economy weighed heavy on investor confidence during the week just-concluded.

Global jitters from the US, China and Europe discounted the healthy fundamentals of the Indian economy and the government’s moves on the minimum alternate tax (MAT) on foreign funds.

The monsoon deficit, earnings’ downgrades and the falling rupee added to the pessimism in the capital markets.

The barometer 30-scrip sensitive index (Sensex) of the S&P Bombay Stock Exchange (BSE) plunged by 620 points or 2.40 percent in the weekly trade ended September 4.

The Sensex ended the week at 25,772.58 points from its 26,392.38 points closing on August 28.

The wider 50-scrip Nifty of the National Stock Exchange (NSE) declined by 347 points or 4.53 percent at 7,655.05 points.

Below-expected first quarter figures on gross domestic product (GDP), eight core industries (ECI) and purchasing mangers index (PMI) hit the Indian markets like a bolt from the blue. All three macro data points were below market estimates.

“Slippage in GDP and PMI figures added to the vulnerability of Indian stocks, which have been troubled by Chinese measures, as well as by the improved potential for a US rate hike,” Anand James, co-head, technical research, Geojit BNP Paribas, told IANS.

“The ECI growth slowed to a three-month low at 1.1 percent, raising the speculation that overall factory output (Index of Industrial Production) could also be lower,” he added.

The ECI’s constituents contribute a whopping 38 percent to the IIP.

The markets were pulled down as investors became anxious about the evolving situation in China and the heightened chances of the US Fed opting for an interest rate hike after a decade or so of an easy monetary regime.

The European Central Bank’s caution against growing external instability by pointing towards the Chinese economic slowdown also spooked investors.

The massive implosion in the Chinese markets, by some estimates, has eroded 40-45 percent of the entire stock value. This, coupled with the devaluation of the yuan and lower factory output signals an impending slowdown.

“Markets continued to remain under pressure this week led by fears of a US rate hike and weak macro data from China,” Vaibhav Agrawal, vice president, research, Angel Broking elaborated to IANS.

On the US front, higher interest rates are expected to lead away foreign portfolio investors (FPIs) from emerging markets like India. This is also expected to dent business margins as access to capital from the US will become expensive.

“We are seeing a flight of liquidity from emerging markets with India seeing FII outflows of $3 billion since August,” Agrawal cited.

Despite the government’s announcements on MAT, attractive valuations, healthy macro data from US and the ECB’s decision to continue its bond buying programme, the markets continued their downward trajectory.

“Even encouraging US data and EU stimulus failed to improve sentiments,” Gaurav Jain, director with Hem Securities, explained.

In terms of positives the Indian government on Tuesday decided against imposing MAT on foreign portfolio and institutional investors. The MAT on capital gains was expected to impact the margins of foreign funds.

The ECB on Thursday announced its plans to either increase the value of the monetary stimulus or extend its assets purchase programme.

Notwithstanding these trends, investors gave more weightage to negative cues such as depreciation of the rupee, a deficient monsoon and rising oil prices.

“Sell-offs across the globe, China jitters and continued depreciation of the rupee triggered the sharp cut in the Indian benchmarks,” Jain said.

The steep rise in crude oil prices of around $10 per barrel in just over a few days became a cause of worry, especially given the fact that the rupee is falling.

On Friday, the West Texas Intermediate (WTI) closed at $46.05 a barrel, while Brent crude settled at $49.61 a barrel. Both the indices were around $40-42 per barrel merely a few weeks back. (IANS)