Credit default in the US housing market returned on Thursday to haunt Indian bourses. Stocks opened strong and the Sensex was trading comfortably in the range of 15,500 points till news about leading French bank BNP Paribas freezing redemptions in three of its investment funds led to selling across the board. From a 235-point gain at the intra day high of 15,542 points, the Sensex took a 480-point tumble to 15,062.10, and closed with a marginal recovery at 15,100.15.
“Reliance, ONGC, Larsen & Toubro, Hindustan Unilever all the frontline stocks witnessed offloading and the feeling was that foreign institutional investors are selling,” said Ramesh Patel, a member of the Bombay Stock Exchange.
FIIs and domestic investors were net buyers with Rs 27.23 crore and Rs 72.14 crore net inflows, according to statistics available on National Stock Exchange site.
FUNDS HAVE been borrowing from markets where lending rates are lower and have been using that money to buy high-yield securities in the US market
LENDERS IN the US have been bundling poor quality loans with others and selling them as securities to these funds
THAT IS WHY it is difficult to assess the losses arising out of US sub-prime market and how long it will take to set it right
After Bear Stearns closed redemptions in one fund and Australian Macquarie Bank reported about 25 per cent losses in two of its funds because of US sub-prime market exposure, came the latest shocker from BNP Paribas as it froze redemptions in in three of its investment funds worth $2.2 billion because of its inability to calculate net assets values of the underlying assets.
Speaking to reporters, Guy Strappe, Prudential's regional head of investment management for Asia, said the Indian market is not as nervous about “sub-prime fears” as Europe and other markets.
“There is a huge participatory note market within FII investments in India. They could be the first to sell on suffering losses elsewhere,” said the head of research at a Bombay Stock Exchange brokerage. FII investments in India have been dominated by investments through participatory notes, a derivative instruments issued by FIIs registered in India to their investors.
“Retail investors are watching from the sidelines. And when FII selling dampens the market, domestic operators do not support it as they want to buy at lower levels,” said Patel. With the European and US markets in the red on Thursday, the cues are weak for Indian bourses on Friday.