To stop bleed, Fed cuts deep

When the Fed cut the rate by 50 basis points last September, the Indian market witnessed a powerful bull run and huge foreign institutional inflows.

Earlier today, there was chaos and panic on Dalal Street and in world markets for the second day in a row. Nervous selling was the order of the day and the Sensex tumbled by 13 per cent, or 2,200 points, in the morning session. But the market came off the lower level on bargain hunting and huge buying by local funds and institutions, closing with another huge loss of 875 points or five per cent.

Most Asian markets closed 4-8 per cent lower amidst fears that a recession in the US would pull down global economic growth.

The Indian market witnessed a selling avalanche early in the morning and marketwide circuit filters were applied after an intra-day 10% fall occurred in key benchmark indices within minutes of commencement of trade. Trading on bourses was halted for one hour as circuit filters were applied.

Before trading resumed at 10.55 am, Finance Minister P Chidambaram stepped in and tried to soothe frayed nerves. “I am assured by RBI and all the banks that enough liquidity will be provided to brokers and market players. Liquidity will not be an issue,” he said.

Ahead of his visit to Davos for the World Economic Forum, Chidambaram exuded confidence that investors would return to the market as the fundamentals of the economy were strong.

“Worries of the western world should not be allowed to overwhelm us… our economy is very different from some economies of developed countries. Our economy is a strong economy and the corporate sector is very strong,” he said.

Though the market made a recovery after the Minister’s statement, it fell again as nervous investors started unloading. The Sensex plunged by 2273.93 points at one stage before investors started bottom fishing. It gradually recovered on buying support by local mutual funds and institutions but still lost 875.41 points at 16,729.94.

Across Asia, markets closed with huge losses. Hong Kong’s Hang Seng (down 8.65 per cent), Japan’s Nikkei (down 5.65 per cent), Taiwan’s Taiwan Weighted (down 6.51 per cent), China’s Shanghai Composite (down 7.22 per cent) and South Korea’s Seoul Composite (down 4.43 per cent) bore the brunt of investor fury.

Shahina Mukadam, Head Research, IDBI Capital, said: “The market recovered post-lunch with support from domestic institutions and mutual funds and we expect that the market will stabilise at current levels.”

“The impact of the US sub prime crisis on the financial sector is sending ripples across the world and selling is happening across global markets. Investors should start investing, if they are not already doing so, in the market at current levels and should buy fundamentally strong companies.”

Other analysts agreed. “This is a good time for retail investors to buy into good scrips which have good value and have fallen by 25-30% from the top. Many investors had missed buying the stocks due to the sharp and quick run-up in the market over the last few months. The fundamentals of the economy still remain very good,” said Anup Bagchi, Chief Operating Officer, ICICI Direct.com.

“The fall in the market was accentuated by unwinding of leverage positions. We have good technical support at around these levels, going up to maybe 1000 points below these.”

Experts expect stability to return soon. “We believe this week the market will stabilise, and if volatility gets reduced, slowly the market will recover, as refund money from Reliance Power issue comes back to the system and the market builds on Budget expectation in February,” said Amitabh Chakraborty, President-Equity, Religare Securities.

Markets crawl back

• Asian markets, which tanked for second day in a row, had closed when Fed announced cut

• After cut, stocks opened sharply lower on Wall St but made up losses by mid-day

• Move helped European markets to a higher close. London’s FTSE 100 was up 2.9% after falling 4.3% in early trading