Mumbai: India's benchmark Sensex Index extended its fall for a fourth session on Wednesday, dropping nearly 1,400 points in this period, amid US government shutdown and concerns over global economic growth for next year. The Sensex today fell 406.47 points, or 1.15%, to 35,085.85 at 10.33am, while the broader Nifty index shed 121.25 points or 1.14%, to 10,542.25. Since 19 December till date, Sensex fell nearly 3.7% or 1390 points, while Nifty declined 3.9% or 424 points.
“Weak global cues, uncertainty over partial US Government shutdown and hike in US Fed rate have all contributed to the free fall of the markets around the world. Despite the crude prices in free fall, Indian market is not untouchable from the drastic fall in the global market,” said Yash Pratap research analyst at Choice Broking.
The rupee and bond prices gained after crude oil prices fell below $50 per barrel for the first time since July 2017. The rupee was up 0.2% at 70.02 a dollar, while the 10-year bond yield was down 5 basis points at 7.23% from its previous close of 7.287%.
Last week, the Federal Reserve's Open Market Committee voted unanimously to raise interest rates , as had been widely expected, but forecast further increases next year - albeit fewer than had been pencilled in last September.
“Markets sell off on Fed's “not dovish enough” commentary while hiking rates 25bps. This wiped out the gains from Mexico's “better than feared” budget release. Our outlook for an “anxious market” in 2019 looks to be on target for now”, said CITI report in a 20 December note.
Overnight, President Donald Trump expressed confidence in Treasury Secretary Mnuchin, the Federal Reserve and U.S. economy. Trump's earlier criticism of Fed Chair Powell, the government shutdown and Mnuchin's attempt to reassure investors contributed to further declines in US stocks on Monday and a 5% plunge in Japanese equities on Christmas Day.
Domestically, fears of higher fiscal slippage after recent cut in many goods and services tax and more populist measures ahead of general elections next year dampened sentiment.
According to minutes released by Reserve Bank of India last week, a majority of members cited upside risks to inflation and emerging downside risks to growth for keeping unchanged policy rates. The members also flagged posibility of fiscal slippage influencing the inflation outlook, heightening market volatility and crowding out of private investment.
“A sharper-than-expected slowdown in the Chinese economy and longer-than-expected expansion in the US economy may result in further pressure on CNY, higher-than-expected rate increases by the US Fed, continued strength in the USD and related pressure on EM currencies” said Kotak Institutional Equities in a 20 December note.
“The Chinese economy is slowing down with most growth indicators barely in the expansion zone and retail sales slowing down sharply over the past few months. China has already embarked on fiscal and monetary measures (see Exhibit 7 for recent initiatives) to support the economy but the Chinese government's efforts to support growth have been inadequate in reversing the slowdown”, Kotak report added.
Kotak Institiutional also said that the further escalation (a reasonably high-probability event) in ongoing China-US trade issues into a full-blown trade war could result in further disruption to and slowdown in the Chinese economy. Other EMs could be collateral damage in the process although India would be relatively less affected given its low export dependence, it added.