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November bloodbath: Worse yet to come for Sensex?

Rajiv Bhuva     November 23, 2011
There's nothing right or left about a market mayhem. The bloodbath at the bourses made that point very strongly.  As the BSE Sensex slipped way below the psychologically important level of 16,000 , it seemed to be a fall waiting to happen. Opening at 16,065.42, the Sensex dropped down by 586 point, or 3.65 per cent, to touch 15,478.69, before recovering in the post-lunch session to close at 15,699.97, down 365.45 points or 2.27 per cent. In 2011 alone, the market has lost 4,800 points.  

Rajiv Bhuva
Rajiv Bhuva
The market
has now dipped down to two-year lows on the back of deteriorating global economic conditions and a weak rupee. Consumer durable was the only sector that stood the ground on Wednesday whereas all other sector saw across the board fall in their prices. 

The rupee touched its all-time low of 52.73 against the dollar on Tuesday, and is down nearly 17 per cent from its 2011 high in July. For the economy that means a swelling current account deficit and rising import bill given that 70 per cent of India's oil demand is met through imports. So a decline in oil prices gets neutralised with the weakening in rupee. But for markets the strengthening dollar has put lot of pressure on the equities. "The companies with dollar-denominated debt are facing the heat of rising dollar and their stocks have succumbed to the selling pressure," says Milan Bavishi, Research Head at Mumbai-based Inventure Growth and Securities.

Global woes, ranging from lower than expected US GDP numbers to fear around the European contagion, were at the centre of the concerns sparking a sell-off across global equity markets and India was not an exception.

The weak rupee has taken the centre stage in the current series of concerns where sticky (and high) and increased interest rates have become matter of passing remark. The reasons are obvious too. While India's oil demand is largely met by imports and that keeps the demand for dollars on the higher side, weaker currency is an incentive for foreign institutional investors, or FIIs, to sell. Exactly four months ago, on July 23, a dollar spent to buy an Indian stock had the purchasing power of Rs. 44.33. That means that if an FII spent $ 10 million, stocks worth Rs. 44.33 could be bought and similarly if stocks worth Rs. 44.33 were sold on the day that would have got converted into $10 million. But now with the rupee losing its strength, an FII is better off as a seller than a buyer.

Despite a 23.45 per cent correction in the BSE Sensex from the start of 2011, Indian stocks are unable to draw FII investments at a time when a weak currency increases their purchasing power. On the contrary, the deteriorating global economic scenario is drawing FIIs out which is visible in rising FII outflows. During the current month, SEBI data as on November 23, shows that FII have been net sellers to the extent of Rs. 862.4 crore ($ 147.46 million) on the equity front.

And for companies, the weaker rupee is a crisis brewing, especially for those companies which chose to borrow in foreign currencies overseas to take advantage of lower interest rate outside when domestically the interest rates were on a rising spree. The worst is certainly far from getting over for the markets.



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