Sensex plunges as FIIs, mutual funds press sell button

Index sheds 395 points on Friday

MUMBAI: When inflows from foreign institutional investors (FIIs) trickle down, the Sensex tumbles. They need not even pull out; this market can’t hold even if they reduce buying.

Finance Minister P Chidambaram on Friday said the economy can sustain a growth rate of 9%, but the growth may dip below 9% in case of some turbulence. He said the steep rise in stock markets is a cause for concern. The rally is being driven by large inflows of overseas funds, and the markets may cool down after some time, he added.

And cool down they did as FII inflows reduced to their lowest since the Fed rate cut on September 18. For the past 16 sessions, FIIs had been on a shopping spree, buying an average of Rs 1,859 crore every trading session.

On Friday, they net bought only Rs 315 crore. Though this took the total FII buying, post Fed-cut, to Rs 30,000 crore, it was the lowest they bought since then. The Sensex tumbled to its biggest fall since the rate cut, losing 395.03 points, or 2.1%, to end the day at 18,419.04.

It hit an intra-day low of 18,336 in late trade. At the day’s low of 18,336, the Sensex declined 478.07 points for the day.

The markets opened down, taking cues from overseas, and remained volatile during the early hours of trade. The annual general meeting of Reliance Industries Ltd did not bring any surprise of a stock-split or a bonus issue as anticipated by the market, following which the stock corrected by almost 2.5 %.

The fall was accentuated by heavy profit-booking by MFs, which sold equities worth Rs 883 crore, according to provisional figures on the NSE website.

This is the highest-ever single day sale by the domestic institutions. The previous highest was on December 11, 2006, when they sold for Rs 657 crore.

In the absence of buying support from FIIs, domestic institutions brought the Sensex down 1,000 points — from 13972 to 12955 in just three trading sessions.

Are they up to something similar? They have been doing their bit for sometime now. In October alone, they sold stocks worth Rs 3,367 crore. But the market kept the momentum with global funds lapping it all up. But once they stopped buying, the cracks appeared. According to Devendra Nevgi, CIO, Quantum Mutual Fund, “We are witnessing a bubble and it can’t go on forever. An asset bubble is usually self-fulfilling. Buying sends prices up, which causes other people to buy more. In a typical asset-bubble scenario, experts often try to find a rationale for the overpriced markets (say structural changes or new economy), so as to be not against the crowd and everyone invests with the intent of finding a ‘greater fool’.”

This can’t go on forever, he says. “Any deviation from fundamentals cannot sustain forever. Although liquidity may distort asset prices in the short run, the winner is inevitably the fundamentals in the long term,” he said. As of July 2007, of the total $225 billion FIIs invested in the Indian markets, $89 billion (40%) came through the participatory note route.

It is difficult to ascertain the nature of the buyers. This is largely of ‘non-sticky’ nature, say experts. Therefore, it can be assumed that anywhere between $2.5-3 billion of $6 billion-plus inflows received can fly back.

R Shree Sankar, head of research, IL&FS Investmart, says, “It is difficult to ascertain the nature of flows. But as long as liquidity remains, buyers would keep coming.”

Will they come on Monday?
“We expect the markets to bounce back on Monday all though intraday volatility of 600-700 points cannot be ruled out during the results season,” said Amitabh Chakraborty, president (equity), Religare Securities.