The dive was triggered by the 184-point fall of the Dow Jones
Raj Nambisan/Sanat Vallikappen
MUMBAI: The cloudburst first occurred inside the bourses on Wednesday.
The thunderclouds gathered late on Tuesday itself, when a United States government report showing surging fuel costs drove down American consumer confidence by the most in eight months.
The report deepened concern that growth in the world’s largest economy will slow down, even as accelerating inflation forces the Federal Reserve to increase borrowing costs.
The result? The Dow Jones fell 184.18 points, precipitating a plunge across the world. So much so that emerging-market shares clocked their biggest monthly drop in more than three years.
Investors were pulling out as the prospect of higher interest rates and falling commodity prices redirected portfolio fund flows back towards stronger economies.
The Sensex, after a 230-point gap-down opening, was showing signs of resilience and even recovery by Wednesday afternoon.
But all hell broke loose when the European markets opened in a swathe of red, with the FTSE falling as much as 7 per cent.
The Sensex nosedived 675 points to 10,111.96 before the government came to the rescue with some fantastic GDP data. It recovered 287 points from there, to close at 10,398.61.
For the record, Wednesday’s plunge washed away investor wealth worth Rs93,255 crore.
But why such loss at a time when data indicate India is growing at the fastest clip - barring China - among the world’s 20 biggest economies?
“GDP growth is a very long-term economic indicator, which the markets may have already discounted,” said DD Sharma, senior vice-president of research, Anand Rathi Securities. “Bourses move up or down depending on fund flows. When inflows or liquidity is high, they rise beyond reasonable levels, and when funds taper, bourses move down.”
Point stands, because foreign institutional investors sold stocks worth Rs651 crore on Wednesday, taking their total sales in the last 14 sessions to Rs11,121 crore.
Naturally, Cassandras abound: Parameswara Krishnan, who manages about $150 million at DNB Nor Asset Management in Chennai, told Bloomberg, “The reversal in global liquidity away from emerging markets will last longer than a few weeks.”
The withdrawal fever is pervasive, lending credence to this hypothesis. According to Emerging Portfolio Fund Research, a Boston-based research firm, funds invested in shares of developing nations lost $5 billion from withdrawals last week, the most in two years.
Indeed, there is a hurry to exit.
(With Bloomberg & inputs from Kishor Kadam)
