Panic selling a result of falling rupee, political limbo and eurozone crisis

The BSE Sensex fell 3.6 percent on Wednesday to its lowest level in two years, ahead of the expiry of derivative contracts, as investor confidence in the domestic and global economy weakened.

Brokers said a fresh bout of selling by funds and retail investors, cashing in on the brief recovery of the equity markets yesterday amid a weak trend in global markets, weighed down the trading sentiment.

In addition, they said, expiry of monthly derivative contracts later this week and fresh concerns about the health of the global economy after a downward revision of the US growth rate in the third quarter of 2011 dampened investors’ mood.

They have blamed the steep fall on unwinding of long positions in the futures as option segment and worsening of the European crisis. According to moneycontrol.com, traders are finding it very difficult to liquidate their F&O positions, which is forcing them to sell at lower prices.

Moreover, since a falling rupee is likely to depreciate the portfolio value of foreign institutional investors, market rumours suggest that foreign funds are amongst the heavy sellers today.

On the macro front, there is good demand for the US dollar due to the turmoil in Europe, which in turn has put further pressure on the rupee. Foreign investors are not willing to pump in money even when valuations have become attractive.

If FIIs continue selling, the market is likely to dip by another 20 percent, said Suresh Mahadevan, managing director and head of Indian equities at UBS Securities .

“However, this is simple liquidity sentiment driven, and fundamentally rupee is the last straw. We haven’t seen any worrying flows yet but we have seen selling at the margin, " he said.

Even though investors are interested in India, they are looking at better levels and catalysts. Rupee is just one of the factors that have made foreign investors risk averse. But the real cause is inflation and general US dollar strength.

“List of problems are increasing by each passing day; inflation is growing, GDP growth is expected to be lower and rupee has depreciated to its lowest, I think the slide was on the cards,” Jagannadham Thunuguntla, head of research, SMC Investments and Advisors Limited told Reuters.

According to Ambareesh Balinga of Way2Wealth panic selling has been driven by three things- rupee, political limbo and eurozone crisis.

“Although the rupee has not depreciated much today and is appreciated to a certain extend, the latest information of the political limbo is what would actually be a bigger worry for us than the eurozone.”

Watch video: market can go down 20% more; surprised by Re slide: UBS

With inputs from Agencies