The Hindu : Business : Sensex sheds 230 points

Online edition of India's National Newspaper
Wednesday, May 12, 2004

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Business

Sensex sheds 230 points

By Oommen A. Ninan

MUMBAI, MAY 11. As the techno-savvy Chandrababu Naidu conceded defeat, yielding to the popular verdict in Andhra Pradesh, the stock market seems to have gone with the wind as well. The benchmark index crashed by 229.94 points to 5325.90 today, recording one of its biggest-ever falls on a single day. In a parallel development, the rupee lost 36 paise against the dollar, closing at 45.40/42 a dollar.

The Bombay Stock Exchange 30-share sensitive index (Sensex) opened below the 5500 mark, with a huge negative gap of 84 points at 5472 against the previous close of 5555.84. By the forenoon, it had dipped below the 5400 mark, as brisk selling continued even while news of the Telugu Desam Party's (TDP) rout kept pouring in. The relentless selling across the board sent the Sensex deep into the red, which touched an intra-day low of 5309 in the afternoon trading, although it did recover marginally to close at 5326. This has been the worst loss that the Sensex has suffered since July 24, 2000, and its biggest fall in the last 46 months. On the National Stock Exchange (NSE), the Nifty slipped by 70 points to close at 1699.

The fear of poll uncertainties gripped the foreign exchange market as well, with the rupee losing 45 paise in intra-day trading. However, it rallied to close at 45.40/42 against 45.06. Market participants took a cue from the TDP's defeat, reading it as a sign that things might not look too rosy for the National Democratic Alliance (NDA) at the Centre, whose prominent supporter Mr. Naidu has been. While the rupee began to fall against the dollar, corporates rushed to cover the dollar to make their import payments. This further precipitated the fall.

"One of the biggest reasons for the crash on the bourses is the exit polls, which have predicted that the NDA will fall short of the 272-seat mark. This would mean that, even if the NDA comes back to power, it will need support from outside and may have to make a lot of compromises," said Alok Agarwal, Senior Analyst, Motilal Oswal Securities, a leading broking firm, adding, "This could slow down reforms, and the market does not like that."

Mr. Agarwal also suggested another reason for the debacle. "For the last three days, we have witnessed FII selling, as they have pulled out money from the market on a net basis, which is not a good sign. From being continuous buyers, the FIIs became sellers in the market," he said.

"This could surely be a short-term event as institutions are selling now, only to hedge themselves in case of a delay in the formation of a government at the Centre."

"However, the markets have taken a negative signal out of this, even though this could be a short-term aberration," said Mr. Agarwal, adding that "global markets have also seen a meltdown and an impact of that is also being seen on Indian markets."

"Today's crash is not only on account of the outcome of the Andhra Pradesh Assembly election but also due to weak global trends in the last two days," agreed A. Balasubramanian, Vice-President, Investments, Birla Sun Life Asset Management Company. Global markets have been extremely volatile due to three major factors: first, the fear of an interest hike in the U.S.; second, the impact that the slowdown in the overheated Chinese economy has had on the world market; and third, the negative impact of the rise in oil prices."

Observers note that all these factors have resulted in the fall in the equity market.

"While there is a substantial appetite for equity investment, and the outlook for equity investment as a whole continues to remain positive, the short-term uncertainties have made investors hold back their investments in a falling equity market", Mr. Balasubramanian added.

The Prime Minister, Atal Bihari Vajpayee's recent comment that the NDA would prefer to sit in the opposition if it does not get more than 250 seats in Parliament has triggered a view among analysts and market participants that a government will be formed at the Centre only after prolonged backroom negotiations, perhaps even intensive horse-trading. But the markets are not comfortable with such uncertainties.

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