Indian equities slid to their lowest levels in three months as a falling rupee, surging global crude oil prices and weak global cues weighed on investor sentiment.
The rupee fell to an all-time low of 73.6 against the dollar on Thursday, down more than 13 per cent in the year to date, making it the worst performing currency in Asia. The rise in inflationary pressures could compel the Reserve Bank of India to raise interest rates on Friday, experts believe.
The S&P BSE Sensex declined 2.24 per cent, or 806 points, to 35,169, while the 50-share Nifty slumped 2.4 per cent to 10599, below its 200-day moving average.
The selloff on Thursday was led by oil marketing companies and energy major Reliance Industries, which fell 7 per cent. The government announced a cut of Rs 2.50 per litre in petrol and diesel prices of which oil marketers have been asked to absorb Re 1 per litre. Shares of HPCL, BPCL and Indian Oil declined 12.2 per cent, 10.9 per cent, and 10.6 per cent, respectively.
Market observers believe that some of the long-only funds invested in blue chips were exiting their positions following the sharp currency depreciation and increasing concerns over corporate governance practices among Indian companies.
Foreign portfolio investors (FPIs) sold stocks worth Rs 27 billion on Thursday, provisional BSE data shows. FPIs have offloaded stocks worth Rs 148 billion since August, taking their year-to-date sales to Rs 182 billion. In comparison, domestic institutions have shopped for equities worth Rs 845 billion this year.
"Investors are worried about the contagion effect of some of the liquidity-related issues, and it's difficult to hazard a guess as to how far it will go," said Vikas Khemani, president and CEO, Edelweiss Securities. "The biggest worry remains the surge in crude oil prices and the possibility of a US sanction on Iran."
Crude oil prices rose to $86.3/barrel and is up more than 50 per cent in the year-to-date. Brent crude prices have been hovering above $85 a barrel, the most since November 2014, on fears that the impending sanctions on Iran's petroleum industry would lead to constricted supplies. The surge has come at a time when the dollar is gaining against most global currencies and amid the US Federal Reserve embarking on monetary tightening.
According to experts, high oil prices coupled with a weak rupee could dent India's economic performance. Oil above $80 a barrel, they say, will disrupt the trade balance, increase the risk of fiscal slippage, and pose an upside risk to inflation.
"Things will be challenging until the oil price comes down to $55-60/barrel," said Khemani, adding that growth might slow down as well if credit supply remains restricted in certain sectors
Asian shares retreated as well on Thursday, with gains in the dollar and the surge in global crude oil prices spooking investors. Japan's Topix index reversed its morning gains and fell at the close while Chinese shares listed in Hong Kong slumped about 2 per cent. Indonesian and Philippine equity gauges lost more than 1.5 per cent, according to Bloomberg.
Back home, 1914, or 68 per cent of BSE stocks declined. Twenty of the 30 Sensex components and all of the 19 sectoral sub-indexes compiled by BSE slid, with the basket of energy stocks dropping the most at 6.7 per cent.
Volatility is likely to continue. "Bears are in control and participants have no option but to align their positions accordingly. We reiterate our view to prefer trading through options instead of naked futures, citing excessive volatility. Nifty has next support around 10,400," said a note put out by Jayant Manglik, president, Religare Broking.