Published On : Sat, Aug 22nd, 2015

Four reasons why index dropped 800 pts in 2 days

Mumbai/Nagpur: The stock market seems to be moving in just one direction, as the Sensex’s south-bound journey on the back of relentless selling pressure shaved 800 points off the index in last two days.

In addition to Thursday’s 324 points slump, the Sensex in friday’s early trade crashed 477 points on all-round selling pressure with the benchmark index now erasing all its gains of 2015. On December 31, 2014, the Sensex had closed at 27,499, but with yesterday’s fresh correction the index slipped to a low of 27,131.44, giving away all its surplus gains it had registered during the course of the year so far.

At 12.50 pm, the 30-share benchmark Sensex was at 27,206.30, down 401.52 points, or 1.5 percent from previous close. The broader 50-share CNX Nifty was at 8,249.05, down 123.70 points, or 1.5 percent.

The palpable gloom evident in the market over the past week or so has once again given rise to lot of pessimism among the investors inflicted by the outcome of both internal and external pain.

Here are four important factors that led to the slump in markets yesterday:

1) Global slowdown worry resurfaces as China growth fear looms:

China’s worsening economic scenario has triggered a wide-spread panic selling in world markets in last few months. The wories about China have nullified all the optimism about the likely revival in the US. In fact, expectations are that the US Fed may delay its much-awaited rate hike due to slowdown fears.

Even the latest data showed China’s August factory output shrank at its fastest pace in almost 6-1/2 years added to the local market gloom. According to a Reuters report, the preliminary Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) stood at 47.1 in August, well below a Reuters poll median of 47.7 and down from July’s final 47.8.

Chinese stock markets also felt the heat with the Shanghai Composite index tumbling 3 percent while Hang Seng dropping 2.3 percent in early trade, while Japan’s Nikkei had eased 2.3 percent. Overnight, key US indices had fallen over 2 percent each.

2) Rupee at fresh two-year lows:

The Indian rupee fell further to 65.90 against the dollar yesterday, a fresh two-year low, as the currency war started by China a couple of week’s back by depreciating its yuan to fire up its exports has prompted other nations, including India, to keep their currency low.

On Thursday, Reserve Bank of India Governor Raghuram Rajan also highlighted the risks emanating from the yuan devaluation. “I think if the Chinese depreciation holds to about this level, it’s not something that one should be overly concerned about,” Dr Rajan said at a banking event in Mumbai. “If it’s part of a process of getting competitive advantage through … longer term depreciation it has to be worrisome across the world, partly because you could have tit-for-tat actions,” he added.

3) Foreign investors taking exit route:

While foreign investors have been pulling out funds from emerging markets in hordes, of late Indian markets have been no exception, with FIIs offloading shares worth Rs 1,007 crore on Thursday, as per the provisional data. So far, in this month, overeas investors have sold shares to the tune of Rs 1,767 crore. As FIIs have been the dominant players in Indian stock markets over the years, their exit is also creating uncertainty among the investors leading to a sharp fall in the market.

4) Fading rate cut hopes on monsoon concerns:

As the monsoon continues to play truant in the current month with rainfall deficit rising to 10 percent, there are indications that the RBI may not take decision on further rate cuts in a hurry given the rupee’s steep fall in recent weeks. After the July inflation fell to a record low, stock market experts were anticipating a rate cut sooner than later in order to to give a boost to the economy. However, weakening rainfall scenario and a steep fall in currency could derail the early rate cut hopes, which has led to pessimism amongst the investors.