After a positive start, markets fell face down, reacting to the statement made by rating agency Standard & Poor that said India could become the first of the so-called BRIC economies to lose its investment-grade status.
“In our view, setbacks or reversals in India’s path toward a more liberal economy could hurt its long-term growth prospects and, thus, its credit quality. How India’s government reacts to potentially slower growth and greater vulnerability to economic shocks may determine, in large part, whether the country can maintain its investment-grade rating, or become the first “fallen angel” among the BRIC nations,” S&P analysts Joydeep Mukherji and Takahira Ogawa in the report titled Will India Be The First BRIC Fallen Angel.
“S&P statement is negative for Indian market as this would spook already weak foreign flows, which has improved in last few days on account of positive global cues. Rating downgrade would keep pension funds and other long term funds away from India,” AK Prabhakar, Senior Vice President – Equity Research at Anand Rathi told the Economic Times.
In addition to the S&P warning, OECD said that there are signs that the economies of two of the world’s leading emerging powerhouses, India and China, are starting to falter, while Europe continues to be handicapped by its debt woes. So, on the whole, things have not changed much in the past week or so, notwithstanding the worldwide relief rally. Growth is at significant risk across the globe and policymakers need to act urgently to arrest the slide.
The BSE, the barometer of the Indian economy, closed lower by 50.8 points to 16,668. It was also lower by 225 points from its day. The markets had hit a one month high post the announcement. The S&P CNC Nifty also closed lower by 14 points to 5,054.
The rupee also weakened against the dollar as it fell to a session low at 55.62/63 against the dollar after the announcement. However, India’s benchmark 10-year bond yield showed a more muted reaction, trading down 1 basis point at 8.34 percent from its previous close. Among sectoral indices, 11 closed in red followed by capital goods, health care and realty.
“One third of the Sensex companies continue to show a decline in profits and over half the companies in our (coverage) universe disappointed. Margins continue to disappoint and fell to 7 year lows of 16.3%,” brokerage house Bank of America Merrill Lynch wrote in its report on fourth quarter earnings.
Caution also gripped Dalal Street during the dying hours of trade as investors shifted their focus to a Greek national election on June 17 that could put Athens on a path out of the bloc and precipitate a deeper crisis over the future of the euro, after euphoria over Spain’s $125 billion rescue package, emerged to be short-lived.
While markets may have already factored in bad news for today, they will also be watching the IIP nos which are expected to come out tomorrow.
Among the sectoral indices, Consumer Durables and the defensive FMCG were the only gainers up 1% and 0.2% respectively. The Capital Goods index was the biggest laggard, down 1.6% followed by Pharma, Realty, Oil&Gas, Auto, Bankex and PSU. Power and IT ended almost unchanged.
Tata Power, Bajaj Auto, Grasim Inds, HUL, GAIL and Coal India were among the notable winners on the Sensex and the Nifty.
HCL Tech, BHEL, Cipla, Sesa Goa, L&T, DLF, Jindal Steel, IDFC, Hero MotoCorp and Tata Motors were among the notable losers on both the indexes
BEML fell 2.5% to Rs 375.70 after the Defence Ministry put the CMD of BEML, VRS. Natarajan under suspension following a recommendation by the CBI that he should be kept away from the post to ensure fair investigation in the Tatra truck case.
HCL Technologies lost 2.7% and ended at Rs. 482.35 after CEO Vineet Nayar sold his entire stake in the company for Rs.134 crore.
Suzlon Energy gained 1.1% to settle at Rs. 18.20 on reports the company may get an extension on its bond repayment today.
Indian markets are estimated to have lost around Rs 1 lakh crore or about $20 billion worth of investments from the overseas funds and ultra-rich foreign individuals over a period of less than three months on new taxation proposals and the government’s recent white paper on Black Money.