UPDATED 24/10/2008 9:27:57 PM

Sensex breaches 9K mark

Indo-Asian News Service

Mumbai: Friday witnessed one of the worst ever losses in the history of the Bombay Stock Exchange.
Equities markets opened weak and crashed by noon. The Sensex dipped even below the 9,000 mark
following the Reserve Bank`s decision to leave all key rates unchanged in its mid-term review of the
monetary policy.
The benchmark 30-share sensitive index, Sensex, closed at 8,701.07. On Thursday, the Sensex had
closed at 9,771.70 points. This is nearly 11 per cent down in a day.

Investors were stung as foreign institutional investors started selling stocks in large numbers. On top of
that, the Reserve Bank of India, kept all key rates unchanged in its mid-term policy review on Friday. In
addition, poor global cues played havoc with the markets.

In January, this year, and May, 2004, the Sensex had fallen this sharply. On both occasions, the BSE`s
automatic cut-off mechanism, called the `circuit breaker`, had halted trading to arrest the
plunge. Afterwards, the markets recovered to end only a few percentage points down.

There have been record falls during the past few weeks after the collapse of Lehman Bros of the US on
September 15. However, the erosion at closing Friday was the largest ever in the history of the BSE,
analysts said.

“As far as I can remember this is the steepest fall ever in the history of the BSE in both points and
percentage terms,” said Jagannadham Thunuguntla, head of the capital markets arm of India`s fourth
largest share brokerage firm, the Delhi-based SMC Group.

“Yes, this the biggest ever crash in the BSE`s history,” said Ashish Kapoor, chief executive officer of
Delhi-based Invest Shoppe India Pvt Ltd.

The fall of the broader 50-share S&P CNX Nifty index of the National Stock Exchange (NSE) was even steeper in
terms of percentage.

The Nifty closed at 2,584.00, down 359.15 points or 12.20 per cent from its previous close on Thursday at
2,943.15 points.

The BSE midcap index finished at 3,095.68 points, down 283.04 points or 8.38 per cent from its previous
close on Thursday at 3,378.72 points.

The BSE smallcap index closed at 3,661.83, down 303.87 points or 7.66 per cent from its previous close
on Thursday at 3,965.70 points.

All 13 sectoral indices at the BSE ended with losses with the worst hit being realty, oil and gas, banks and
metals in that order.
Not a single stock that goes into the Sensex finished in positive territory. The biggest loser was DLF Ltd.
that ended with a loss of 23.96 per cent.

Ranbaxy Laboratories came next shedding 17.83 per cent, Hindalco lost 17.82 per cent and Tata Motors
was down 16.54 per cent.

As many as 2,322 or 88.36 per cent of traded stocks declined, only 260 or 9.89 per cent advanced and 46
or 1.75 remained unchanged.

“There was large-scale selling by hedge funds and even by pension funds to protect their assets. Pension
funds normally buy when markets are down,” said Kapoor.

Analysts were also surprised that the RBI chose to keep lending rates and other key liquidity ratios
unchanged in its mid-term policy review announced on Friday.

Religare Securities President Amitabh Chakraborty said: "I`m surprised. I was expecting a cut in the repo
rate and reverse repo rate. I guess the banking sector will see more pressure,"

Thunuguntla also welcomed the RBI move not to add more liquidity because he said the role of the RBI
is to monitor growth and inflation and not to help out the capital markets.

“What is the guarantee that more liquidity would have stopped the fall in equity prices?” he asked.

“On the other hand adding more liquidity would have added to inflationary pressures and might lead to
more problems for the real economy,” he added.

“There is liquidity crisis globally and Indian markets are not immune to that,” he said. “FIIS are selling
ruthlessly to take out whatever money they can because yen carry trade has gone even more out of hand
and they are under tremendous liquidity pressure in their home countries.”

In yen carry trade, hedge funds used to borrow yen denominated loans from Japanese banks at a
negligible interest rate of 0.5 per cent and then converted these funds into other currencies and invested
across the globe.

So, even if they earned a return of as low as 2-3 per cent they still made a profit on those investments
because their cost of funds was only 0.5 per cent.

Now with the dollar appreciating against the yen the conversion rate has hit a 13-year high. Currently the
exchange rate is 95 yen to a dollar when a year ago it was 109 yen to a dollar. This means yen
denominated loans have become costlier by almost 15 per cent so that the cost of yen denominated
loans is now 15.5 per cent against only 0.5 per cent earlier.

This is forcing hedge funds with yen denominated loans to repay those loans as soon as possible and
stop losing money. This is the reason they are selling off whatever assets they have, wherever they have,
to repay yen denominated loans.

“The markets are not a proxy for the real economy. When there was 9 per cent growth in the last two
years markets grew by 40 per cent. Now even if domestic economy grows 7-8 per cent markets have
crashed more than 50 per cent,” Thunuguntla said.

When there was great global liquidity, FIIs invested in India pushing up the markets, he said. Now there is
no global liquidity so FIIs are pulling out in a hurry.

“I think the RBI`s move not to add further liquidity is, therefore, prudent. The markets will correct
themselves only when the global liquidity situation stabilizes,” he said.
It is also too much to expect that domestic financial institutions with investible surpluses in the range of
$10-15 billion can stem the rot when market capitalization losses are to the tune of $600-700 billion, he
said.

“We enjoyed the benefit of high global liquidity, now we have to bear the other side of the stick,”
Thunuguntla said.

Global cues too were very weak. Both the Dow Jones futures & S&P 500 futures hit the lower circuit
breaker of 7 per cent in European markets.

“US indications are scary since once US markets open at 7 pm Indian time these indices will resume
trading and will probably go down further,” Thunuguntla said.

The Nasdaq futures was also down but at 6.5 per cent it hadn`t yet hit the lower circuit filter. Most
European markets were down by around 10 per cent on news that the UK GDP had shrunk 0.5 per cent
in the third quarter of this year ending September.

“This is the first time that hard numbers indicating recession in the global economy is coming in and I am
expecting even more bad news in the coming days,” Thunuguntla said.

“I think it wouldn`t be long before some hedge funds and private equity funds begin to report bankruptcy,”
Thunuguntla said.

In India, realty firms have begun to default or seek deferment of payments and although realty prices
have still managed to stay at high levels they are likely to come down in this cash crunch market, the
analysts said.

“The sentiment is extremely negative and although this is a good time to buy you must be ready to wait
for at least 2 year or even more before you can think of returns,” Kapoor said.

“This is a very deep cut and recovery may take as long as 3-4 years,” he said.