Cash-flow cut, FII exit sink index

IT HAS been a record December for the Sensex. After clocking the second-fastest 1,000-point rise in its history and briefly spiking past 14,000 points, the Sensex crashed 400 points on Monday, the seventh-largest single-day fall in its history.

IT HAS been a record December for the Sensex. After clocking the second-fastest 1,000-point rise in its history and briefly spiking past 14,000 points, the Sensex crashed 400 points on Monday, the seventh-largest single-day fall in its history.

HT Image

The Sensex closed at 13,399.43, down 2.9 per cent. The Nifty lost 112.5 points, or 2.84 per cent. On paper, investor wealth, as represented by market capitalisation, or the combined value of stocks available for trading on BSE, lost a numbing Rs 1.73 lakh crore.

While traders pointed to inflation worries and fears of a potential growth slowdown triggered by the Reserve Bank of India’s (RBI) move on Friday to tighten money supply by increasing the cash reserve ratio (CRR), the real reason for the freefall may well have been sell-offs by foreign institutional investors (FIIs), whose moves are shadowed by domestic players. FIIs sold shares worth Rs 334 crore.

Banking stocks fell, following the awareness that a CRR hike would reduce the funds available with the banks for lending, potentially affecting earnings. State Bank of India shares clocked the biggest loss on the BSE. The scrip tumbled by over 8 per cent to close at Rs 1,242.75.

As Tata Steel’s bid to buy steel manufacturer Corus received a setback — its revised offer was topped by Brazilian rival CSN — markets too reacted negatively. Tata Steel lost over 6 per cent on the BSE.

Analysts, however, said a correction was expected. Finance Minister P. Chidambaram allayed fears about the Sensex plunge, saying banking shares, which led the fall, would re-adjust on higher profitability. Pointing out that banking stocks fell because of the hike in the CRR by the RBI, he told reporters that the central bank's move was aimed at moderating credit.