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Why Sensex crashed over 800 points in trade today

The bears continue to tighten their grip on the markets, and the BSE Sensex and NSE Nifty both opened with heavy losses this morning.

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Why Sensex crashed over 800 points in trade today

The bears continue to tighten their grip on the markets, and the BSE Sensex and NSE Nifty both opened with heavy losses this morning. While the former was down as much as 826 points at 35,166.19 courtesy an early selling spree, the 50-share Nifty dived over 240 points to 10,614.50.

This comes on the heels of yesterday's dip, where the 30-share Sensex lost 1.51 per cent and Nifty shed 1.36 per cent, marking their lowest close since July 9.

According to The Economic Times, as many as 41 stocks on the Nifty are in the red, with Eicher Motors, Reliance Industries, Tech Mahindra, TCS and GAIL falling 2-5 per cent. Of course, some companies bucked the trend, like Yes Bank, Larsen & Toubro, Tata Steel and Vedanta, which advanced 0.53-2.11 per cent, but the mood in the market is decidedly cautious ahead of the Monetary Policy Committee's (MPC) decision on the fourth bi-monthly monetary policy. The pundits are all predicting a repo rate hike - the third this year - to be announced tomorrow.

Here are five factors that are spurring on market volatility:

Plummeting rupee: The domestic currency has set a fresh record this morning at 73.77 against the US dollar, after breaching the 73 mark yesterday. This weighed heavily on investor sentiment. It has depreciated nearly 14 per cent in the year so far. Meanwhile, the dollar has strengthened, boosted by a spike in Treasury yields following upbeat US data and the hawkish stance of the US Federal Reserve.

"Dollar dominated the last 24 hours as the rupee collapsed to a fresh all-time low on spot. Policymakers tried everything, monetary intervention, and verbal steroids and even tried to circulate rumours about an "oil window". Nothing worked," said a Kotak Securities report. "The RBI added fuel to fire by denying any attempts to introduce special dollar window for the oil marketing companies." Moreover, rising Italian credit spreads whacked the euro, further pressuring the rupee.

"Market has not reacted positively to steps taken by the government for stability in the rupee as they were perhaps not strong enough to address the key issue of short term demand. Most of the Asian and emerging currencies are calmer in past one month," Sajal Gupta, Head Forex and Rates, Edelweiss Securities, told the daily.

Surging oil prices: Oil has been rallying as worries about Iran sanctions, which kick in on November 4, threaten global supply. International crude oil benchmark Brent yesterday hit a four-year high of $86.74 a barrel. Given that India is the world's third largest oil consumer, and heavily dependent on imports to boot, this is the biggest threat to the domestic economy.

"Market is reacting strongly to Brent crude movements and with the current pace, 75 can likely be seen if crude touches 88-90 levels," said Gupta.

That's bad news because a rise in global prices not only pushes up dollar demand by importers, which impacts the already-widening current account deficit, but also raises inflation concerns back home. Disappointing CAD data - predicted to deteriorate to 2.8 per cent this year from 1.9 per cent of GDP in FY18 - has been haunting Dalal Street for the past few weeks now.

A rise in the current account deficit leads to depreciation in the value of rupee since more of local currency goes into paying for imports.

Rising bond yields: Given that equity markets typically share an inverse relationship with bond yields, the latter has been a cause for concern. India's 10-year bond yield is currently hovering above 8.18 per cent against the previous close of 8.11 per cent, and is up 84 basis points on a year-to-date basis. Moreover, higher yields expose the rupee and equities to dollar outflows.

Foreign capital outflows: Overseas investors pulled out a massive Rs 21,000 crore ($3 billion) from the capital markets in September, making it the steepest outflow in four months, on widening current account deficit amid global trade tensions. Foreign portfolio investors offloaded shares worth Rs 455.02 crore in October so far.

Outflow of funds from the Indian market leads to a fall in the value of rupee since there is more demand for dollars from foreign investors after exiting the Indian market. This, in turn, impacts market sentiment.

Global cues: The subdued Asian markets have also weighed on market sentiment. Brokers said weakness was seen in most Asian markets as high US yield and good economic data led to fear that investors would move to the US, dampened trading sentiments there. Japan's Nikkei was trading 0.46 per cent down at 23,999 as investors took profit from its recent rally to a 27-year high. Meanwhile, Hong Kong's Hang Seng dipped over 1.50 per cent at 26,628.64.

All eyes are now on the outcome of the ongoing MPC meet.

With PTI inputs

Edited By Sushmita Choudhury Agarwal

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