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Crimson tide rages

business Updated: Jan 22, 2008 20:58 IST
Arun Kumar
Arun Kumar
Hindustan Times
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What started as a mere correction on global cues turned into a bloodbath on Dalal Street on two successive days. Following administrative measures taken by the stock exchanges to avert a liquidity crisis, markets went into a free fall till domestic financial institutions chipped in with big buying.

On a day of high volatility, the Sensex closed 875 points, or 4.97 per cent, down at 16,729 from Monday’s close of 17,605.35, while the Nifty ended the day 309 points lower at 4,899, a slide of 5.94 per cent. It was the Sensex’s second-biggest fall after Monday’s crash of 1,408 points. The BSE benchmark index also recorded its biggest-ever intra-day fall of 2,251 points on Tuesday, over 200 points more than Monday’s intra-day slide of 2,049.74 points.

Sanity was restored after Finance Minister P.Chidambaram stepped in to assuage panic-stricken investors, telling them to stay calm and allaying fears about a liquidity crisis. “I am assured by the Reserve Bank of India and banks that enough liquidity will be provided to brokers and market players. Liquidity will not be an issue,” the minister said.

As anticipated, Indian institutional investors led by Life Insurance Corporation of India (LIC) started buying aggressively. In addition, it is understood that banks also provided liquidity to some brokerages to tide over their crises. Brokers, unable to sell in the market, caused a liquidity crisis and the National Stock Exchange, as part of prudent measures, turned off 200 brokers’ terminals. This, in turn, set off a domino effect in the market overall, experts said.

Indian bourses will take their cue now from the US bourses, which were closed for the last three days, said Amitabh Chakraborty, head of equity, Religare Securities. “Since the market is falling for seven days now, it could have a sharp upside on Wednesday,” he said. “But how long the upside will be maintained is not known. We need to get a fix on the impact of the US sub-prime crisis, which is spreading to other financial institutions.”

Some US bond insurers have started defaulting. There are chances the sub-prime virus may thus infect insurance companies, which could trigger further panic selling.

“India offers one of the best opportunities as the price-earnings multiples for 2008-09 are around 17, but foreign funds are continuously selling and have sold more than $5 billion in January. This reflects the problems in the US, Chakraborty added.