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Bloodbath spreads across markets

Indian equities take a plunge with the Sensex recording its second biggest fall ever in absolute terms, reports Vyas Mohan.

business Updated: Aug 16, 2007 22:28 IST
Vyas Mohan

Tracking weak global markets, Indian equities took a plunge on Thursday with the benchmark Sensex of the Bombay Stock Exchange recording its second biggest fall ever in absolute terms. While investors incurred a notional loss of Rs 1.67 lakh crore in one day, they have lost Rs 3.36 lakh crore since July 24, 2007, that is when the Sensex recorded its all-time high close.

Across the world, investors shunned equities to move money into safer assets as they feared an abrupt end to the yen carry trade could derail the bull-run in global equities and worries in the US sub-prime market could spill over to the wider economy. The yen hit a 52-week high of 113.90 versus the dollar on Thursday.

"The contagion seems to spill over from credit markets to equity markets. It is a global phenomenon and the yen carry trade unwinding has hit equities," said Abheek Barua, chief economist of HDFC Bank. The trend is likely to continue unless there are indications that the Bank of Japan might not hike interest rates in September, he said.

Under the yen-carry trade scheme, companies and investors borrow yen from Japanese banks and use it either as capital or invest in stocks and other assets for higher returns by taking advantage of Japan's low interest rates.

While the benchmark Sensex of the Bombay Stock Exchange closed lower by 642.70 points, or 4.28 per cent, the broader Nifty of the National Stock Exchange ended the day at 4,178.60 points, down 191.60, or 4.38 per cent.

Andrew Holland, managing director in India of DSP Merrill Lynch, feels the meltdown in global stocks will continue, as it is a product of several factors. "Volatility is going to continue. It is a combination of several factors. No one has a clue how big the problem is in the US credit markets. Investors are very scared," he said.

Attempts of central banks in several countries to stave off worries of a liquidity crunch by injecting funds into the system proved futile with investors. While the US Federal Reserve added more cash to the banking system on Wednesday, the Bank of Japan injected $3.4 billion into money markets Thursday morning in order to curb rises in key overnight interest rates.

Chartists say the correction could carry on in global markets as most market indices are either near to or below their 200-day moving averages, indicating weakness.

"Major global indices like the FTSE, CAC 40 and many more are trading below their 200-day moving averages. Thus the correction could continue in these markets," said Alex Mathew, head of research of Geojit Financial Services.