Crash course correction

All 30 shares on the BSE Sensex ended sharply lower, dragging the index down 6.76 per cent to 11,391.43 points. The previous biggest one-day fall was 570.42 points on April 28, 1992. The index had fallen by 565 points on May 17 two years ago when election uncertainties pulled the market down.

India joined the sell-off in other global markets as investors were spooked by big losses in US stocks and bet interest rates would keep rising. “I still believe in the India story,” said Nimesh Kampani, chairman of JM Morgan Stanley said from Singapore. “The correction was overdue and no one asked questions when the market was going up and up.”

What also precipitated the fall was the FII tax issue. Reports that the government had planned guidelines that would help distinguish between investors and stock traders so as to tax them—particularly FIIs— differently.

Currently, FIIs pay only 10 per cent tax on short-term capital gains. They will have to shell out 41 per cent tax, if they are treated as traders. That raised concerns that foreign funds, which have put $4.2 billion into Indian equities this year, may trim their positions.

After the market closed with big losses, Finance Minister P Chidambaram dubbed the fall as a “manufactured crisis,” seeking to bring back foreign funds, saying no foreign institutional investor has been assessed as a trader for tax purposes. “No FII has been assessed as a trader as they are investors and this is a manufactured crisis based on uninformed reporting,” he said in New Delhi.

Experts agree that the market was ripe for a big correction. “Something had to give… the market had risen very quickly and was already fragile, so when we were hit overnight with fears of rising US inflation and weak Asian markets, jittery investors bailed out,” said Andrew Holland, vice president of research at DSP Merrill Lynch.

Moody’s economist Paul Guest said it was “hard to say” if the sell-off signalled the end of a prolonged series of market rises. “The sell-off actually started in emerging markets assets last week, special commodities this week and it is now affecting equity markets all over the world,” he said.

The benchmark indices in Hong Kong, South Korea, Taiwan, Australia, Singapore and Japan lost up to 2.6 per cent. However, India’s loss was more pronounced as the FII tax issue added to the nervousness. Wednesday’s sharp sell-off in US stocks—the Dow dropped more than 200 points, or 1.88 percent—was part of a broader market rout, with US treasuries also tumbling amid signs of accelerating inflation.

Raising fears of a slowdown in the US, economic data showed the pace of inflation sped up in April, boosting speculation the Fed would raise rates longer than Wall Street had expected. US consumer prices, excluding food and energy, rose 0.3 per cent in April, higher than market expectations of a 0.2 per cent increase.

However, top Indian brokers said the Indian economy is stable in the long run. “In the short run, it’s just that the supply of equity investments has increased in recent times and demand has fallen. When the markets come down, the valuations become attractive. The market at the moment is in an adjustment mode. Long-term investors can look to buying selectively in this market,” said K R Choksey, chairman, K R Choksey Securities.

In India, there was not a single gainer amongst the blue chips. Commodity stocks across the board shed nearly 10%, taking global cues. FMCG, telecom, cement and auto sectors were the other major losers. “FIIs were silent,” said stock broker Motilal Oswal.

“The fall in the emerging markets for the last few days and expiry of futures and options contracts next week added fuel to the fire.”