Ouch! What a painful day for the financial markets. It was like walking -no, running-on broken glass.
The rupee breached its all-time of 54.30 against the US dollar and dived even further to a dangerous 54.46 by mid-day.The benchmark indices also cracked under exploding fears of the future of the eurozone, especially if Greece were to exit the 17-nation common currency union.
The Sensex tumbled below the 16,000 mark to an intra-day low of 15,974, down 354 points from its previous close, while the Nifty crashed by more than 100 points to an intra-day low of 4,837. Sensex heavyweight Reliance hit a one-year low of Rs 673, while Tata Motors fell nearly 8 percent (although it was also partly due to company-specific concerns). The auto index was the biggest loser, down more than 3 percent. (The indices and currency have recovered now, but only just).
With a sea of red swamping the markets, finance ministry officials stepped in to calm investor nerves. Unnamed officials told CNBC TV18 that the deterioration in markets was "part of an overall broader pattern" and that investors were reacting to "concerns over Greece and the stability of the European Union".
Translation: Look around you, we're not the only ones in a mess. Therefore, don't expect us to do much to salvage the situation. We can't.
These officials also said they thought the rupee would "find its own level" and expected the market to remain bearish for some time.
Thanks a lot. So far, the government has done precious little than to try and jangle foreign investors nerves by introducing contentious proposals such as retrospective taxation, which seems designed with the intent of hassling Vodafone.
Practically all of the fire-fighting in terms of defending of the rupee has been done by the Reserve Bank of India (RBI). But even RBI officials are admitting there is only so much they can do to defend the currency. "We may prop the rupee for sometime by this way or that, but it is not enough," a senior RBI official directly involved in currency management told Reuters.
The RBI has already introduced a host of measures to prop up the rupee since last year, including spend more than $20 billion in spot-market intervention between September and March, including on Tuesday. But the effect has been limited.
The rupee has shed 9 percent since March, the biggest fall among major Asian currencies. The RBI knows it can't defend the currency indefinitely. "We don't have very big foreign reserves. We can't keep supplying dollars to the market," the RBI official told Reuters. Indeed, India's foreign exchange reserves have slipped to $293.2 billion as of May 4 from $306 billion a year earlier.
Even the stock markets may find no real reprieve in the short term given that investors are turning increasingly pessimistic about India's growing list of problems ranging from the threat of stagflation (high inflation and stagnating growth), a ballooning trade and fiscal deficit and lack of progress on economic reforms.
Short-term fixes such as RBI intervention in the currency markets mask the real problem -- the lack of government action to introduce policies that allow the Indian economy to artfully navigate turbulent times.
Indeed, finance minister Pranab Mukherjee blithely blamed the stock market crash on the ongoing Greece crisis and continued to insist that India's "growth story is intact".
He's wrong. Right now, the way things stand, India is not in dire straits as Europe or the US, but its own list of problems and government policy flip-flops are ensuring that the nation doesn't rank as a viable alternative investment destination either.
Until our own problems are fixed, local investors and businesses should probably just suck it up and accept that the rupee and stock markets could fall much further.
Some experts believe the Sensex could even test 15,000, while the rupee could fall all the way to 56 against the dollar. Worse case, scenario, it could even hit 58 against the dollar over the next six months.
Investors, brace yourselves for worse.