Emerging market economies were hammered on Monday in a global sell-off that left them deep in the red. The weakness had started in Latin America Friday with a decline of the Argentine Peso and the Brazilian Real.
It intensified on concerns about a slowdown in the Chinese economy as its GDP growth data came in at 7.7 per cent, the lowest since 1990, and was topped by fresh prospects of the US Federal Reserve withdrawing from its easy money supply position even faster than announced. Investors again rushed back to the security of gold, the Japanese Yen and the US dollar.
In India, the NSE volatility index, which broadly describes investor expectations of bad news, rose by 17.94 per cent in a day, the highest since September 2013.
The rupee closed at 63.10 to a dollar, the first time in almost three months it slipped below 63. The BSE Sensex too plunged 426 points to end below the 21,000-mark. Corresponding to the rout, gold prices rose Rs 70 to close the day at Rs 30,570 per 10 gram in Delhi.
Jayesh Mehta, country treasurer, Bank of America Merrill Lynch said the RBI policy action on Tuesday has become even more crucial for choppy domestic markets to take a cue from. In January, the net inflow into RBI reserves has been negative, he pointed out.
Emerging stocks are the worst performing asset so far this year, with year-to-date losses of 5.2 per cent. The MSCI world equity index fell 0.6 per cent, its lowest in more than a month, following Asia’s decline of 1.6 per cent on Monday.
Political risks in Ukraine, Turkey and Thailand are compounding the problems of Argentina. It has aggravated after an OECD study showed European banks have a combined capital shortfall of about 84 billion euros also hit sentiment.
“Sudden fears about emerging markets and also potential capital shortfalls for some European banks are rattling investors. People have been a bit complacent lately, so it’s quite logical to get a correction,” said David Thebault, head of quantitative sales trading at Global Equities, told Reuters.
European stocks were down 0.6 per cent. The Yen hit a seven-week high of 101.77 per dollar while gold also rose to a two-month high above $1,278 an ounce.
Rupee drops 44 paise to over two-month closing low
MUMBAI: The rupee dropped to the lowest level in more than two months on concern that sell-off in emerging market assets will deepen as the US Federal Reserve reviews its monetary stimulus this week.
Dealers were cautious as the Reserve Bank of India, which will review its monetary policy on Tuesday is expected to keep interest rates on hold. However, the tone of RBI statement will be closely eyed, raising expectations of tighter monetary policy this year. The rupee slipped past the 63-mark for the first time in ten weeks and closed 44 paise lower at 63.10 versus the dollar.
Assuring investors about the economic fundamentals, economic affairs secretary Arvind Mayaram said in Delhi, “Current account deficit (CAD) is below $ 50 billion. Foreign exchange reserves are at all-time high. We have very strong fundamentals. I don’t think that there is any cause of worry.” On the impact of the peso crisis in Argentina on the Indian markets, Mayaram said: “There is no reason why we should believe that if Argentina is in trouble today then Indian rupee should follow. I do not think that correlation exists at all.”
The steep decline in Argentina’s currency peso on Friday triggered a massive fall in markets around the world. Even as the sell-off in other emerging market currencies deepened, the rupee tried to recover and logged a high of 62.65 after the government said there is no need to worry as “economic fundamentals” are very strong. However, the rise proved to be short-lived as the rupee fell back sharply again. ENS