Benchmark equity indices crashed more than 2.6% on Monday and the rupee sank further to a fresh low against the U.S. dollar, on fear of a steep rate increase by the U.S. Federal Reserve to curb galloping inflation in that country..
The S&P BSE Sensex, led by finance and technology stocks, plunged 1,457 points, or 2.68%, to 52,846.70 points. Top losers include Bajaj Finserv (7.02%), Bajaj Finance (5.44%), IndusInd Bank (5.27%), Tech Mahindra (4.845), ICICI Bank (4.46%) and TCS (4.31%).
The NSE Nifty-50 index too lost 427 points, or 2.64%, to 15,774.40.
“Higher than expected hot inflation data in U.S. last week have made markets nervous [about the] U.S. Fed policy meet [in the] current week,” Narendra Solanki, head, Equity Research (Fundamental) Anand Rathi Shares & Stock Brokers. “After high inflation, markets are fearing [that the] U.S. Fed could take unexpected policy measures in order to control inflation which may impact overall economic health,” he said.
V.K. Vijayakumar, chief investment strategist, Geojit Financial Services, said: “Globally, markets have turned weak on inflation fears. It is important to appreciate the fact that globally markets are highly integrated. The mother market, U.S., sets the trend and others follow.”
“U.S. markets are weak on worse-than-expected inflation (8.6% in May versus an expectation of 8.3%) and markets expect aggressive monetary tightening by the Fed. This is unfavourable to risky assets like equities. Rising dollar and bond yields in US will force more selling by Foreign Portfolio Investors (FPI) in India,” he added.
Due to continued and more aggressive selling by FPIs, the Indian rupee came under unprecedented pressure and sank to a new historic low against the U.S. dollar, breaching the 78 level, for the first time ever to close 11 paise lower at 78.04.
“The Indian rupee sank to its historic low today against the U.S. dollar primarily on account of the brutal sell-off witnessed in domestic equities that was triggered by U.S. inflation accelerating in May to a fresh 41-year high, which unnerved market participants,” said Sugandha Sachdeva, vice president, Commodities & Currency Research at Religare Broking Ltd.
“With this fall, the rupee has breached the crucial 78 mark which was providing strong cushion to the domestic currency since past several weeks. The outlook on the rupee is negative for the near term given the concerns about the aggressive rate hike campaign by the U.S. Fed and the advance seen in the U.S. dollar towards a four-week high. As for the near-term outlook, the 78.50 mark is likely to provide support to the local unit,” she added.
Analysts said they believed volatility would continue in the equity market in the near term.