Fed rate hike

Mumbai, May 21: The stage was set for the market meltdown after the Fed rate hike on May 11 followed by the draft circular of Central Board of Direct Taxes (CBDT) indicating that the Foreign Institutional Investors (FIIs) may also have to pay more tax.

Market analysts said both led the Bombay Stock Exchange (BSE) Sensex to dip by 15.3 per cent and the National Stock Exchange (NSE) S&P CNX Nifty to shed 15.6 per cent between May 11 and May 19.

The Fed rate hike by 25 basis points from 4.75 per cent to 5 has triggered the market meltdown from May 11 and onwards. The indications of the further hardening of the Fed rates leading to an upward bias of the global interest rates has weakened the market sentiments. The 30-stock Sensex shed 177 points due to the heavy selling by FII as they sold Rs 1,199.10 crore worth of shares on May 11 itself. The market meltdown has been unabated since then.

According the data available at BSE and NSE, the Sensex lost 1,674 points or 15.3 per cent in seven trading sessions. It slid from 12,612.38 points on May 10 to 10,938.61 points on May 19. Similarly, the Nifty lost 507.35 points or 15.6 per cent, from 3,754.25 points to 3,246.90 points during the same period.

FIIs were the major contributor to this meltdown, the analysts said. According to Securities and Exchange Board of India (SEBI), FIIs off-loaded Rs 3,675 crore worth of shares in the cash market between May 11 and May 18. They sold Rs 810 crore worth of shares on May 18 when the Sensex had the historical dip of 824 points on a single day. Besides interest rate concern, FII have down loaded their stakes in the market fearing that the CBDT's draft circular issued on May 17 may increase their tax burden. Though the Union Finance Minister tried to allay the market fear on May 18 evening but the damage had been done.

FIIs withdrew Rs 1,743 crore worth of shares from the derivatives market also during the same period. They were the sellers for three consecutive days at Rs 822.59 crore, Rs 1,124.52 crore and 1,084.27 crore from May 11.

The mutual fund (MF) investment in the market during this period could not match with the outflow of foreign funds. They were net buyers at Rs 2,372 crore, including Rs 785.36 crore on May 15 and Rs 762.18 crore on May 18.

While the Finance Minister described the crash a correction in the market, pundits expect the major indices to be volatile in the coming days. The projection of the hardening of the global interest rates make the external market more attractive to the foreign funds compared to the domestic one.

Secondly, the hardening of the interest rates also led to the nervousness in the commodities market, including base metal and bullion. Some analysts hold the view that the demand of the commodities is unsustainable in the global market in the long run.

In this changing global scenario, the investors, especially the retail participants, need to be cautious while making investment in the market. They need to adopt wait and watch' policy till the market stablises.

UNI