Depreciating rupee coupled with weak global cues drag benchmarks lower

Distressed markets clobbered out of shape in Wednesday’s trade with benchmarks ending the session with a cut of about one and half a percentage point, weighed down majorly by the depreciation in rupee. Indian rupee fell below 60 per dollar mark on heavy demand for the greenback. The combination of domestic as well as global factors led to the brutal across the board selling and local bourses snapped the session below their crucial 5,800 (Nifty) and 19,200 (Sensex) levels. Sentiments remained down-beat since morning with frontline gauges making gap-down start. Indices extended their southward journey after India’s HSBC services Purchasing Managers’ Index (PMI), based on a survey of around 400 companies, fell from May’s three-month high of 53.6 to 51.7 in June. 

Selling pressure in bank shares after the RBI mooted extra provisioning and capital requirement for banks’ exposure to companies with unhedged forex exchange positions too dampened the sentiments. Some pressure also came in after investors offloaded stocks related to power sector on report that government may stop accepting fresh applications from power plants seeking coal supply for the next two years in view of acute coal shortage.

Selling got intensified following sluggish opening in European markets. CAC, DAX and FTSE edged lower in early deals after Portugal’s Foreign Minister Paulo Portas resigned, triggering the worst political crisis since Portugal accepted an international bailout two years ago. While, all the Asian equity indices ended the trade in the red as sentiment remained dampened after activity in China’s services sector stayed lackluster in June as new orders grew at their weakest pace in more than four years, adding to signs of a slowdown in the world’s second-largest economy.

Back home, brutal selling on Metal counter too supported the downfall with stocks like JSW Steel, Sesa Goa, Sterlite Industries, SAIL, Hindalco, Nalco and Tata Steel edging lower on weak Chinese economic data. The nation’s services Purchasing Managers’ Index fell to 53.9 for June from May’s 54.3, though it remained above the 50 level dividing expansions from contraction. China is the world’s largest consumer of copper and aluminum. Additionally, selling was also visible in public sector oil marketing companies viz. BPCL, HPCL and IOC after US crude oil futures crossed $100 a barrel for the first time since September 2012 as Egypt’s political tensions escalated and as stockpiles in the US shrank the most this year.

The NSE’s 50-share broadly followed index Nifty lost over about ninety to end below its psychological 5,800 support level, while Bombay Stock Exchange’s Sensitive Index - Sensex declined by over two hundred and eighty points to finish below its psychological 19,200 mark. Moreover, the broader markets too were clobbered out of shape and ended the session with a cut of about one and a half percent.

The overall volumes stood at over Rs 1.50 lakh crore, which remained on the higher side as compared to that on Tuesday. The market breadth remained in favor of declines as there were 787 shares on the gaining side against 1,528 shares on the losing side while 129 shares remain unchanged.

Finally, the BSE Sensex shaved off 286.06 points or 1.47% to settle at 19,177.76, while the CNX Nifty plunged by 86.65 points or 1.48% to end at 5,770.90.

The BSE Sensex touched a high and a low of 19,347.11 and 19,147.31, respectively. The BSE Mid cap index was down by 1.69% and Small cap index was down by 1.44%.

The top gainers on the Sensex were, Sun Pharma up by 1.25%, Jindal Steel up 0.98% and ITC up by 0.42%, while Tata Power down by 4.90%, SBI down 4.58%, Sterlite Industries down 4.58%, Tata Steel down 4.54% and Hindalco down 3.61% were the top losers on the index. 

The top gainers on the BSE Sectoral space were, FMCG up 0.26% and Healthcare up 0.23%, while Realty down 4.76%, Metal down 3.11%, PSU down 3.08%, Consumer Durables down 2.84% and Power down 2.67% were the top losers on the sectoral space.

Meanwhile, in order to ward-off any possibility of default by corporates having unhedged forex exposure, the Reserve Bank of India (RBI) has proposed to impose an incremental provisions and capital requirements on banks, which lend to these corporates. The central bank said in its draft guidelines that corporates who do not hedge their foreign currency exposures can incur significant losses due to exchange rate volatility and increases the probability of default and thereby affecting the health of the banking system. The RBI further said that unhedged foreign currency exposures of the corporate are an area of concern not only for individual corporates but also to the entire financial system.

As per the draft guidelines, banks will have to collect information on unhedged foreign currency exposure separately from the corporates. Further, the RBI advised banks that loss to the corporate due to dollar-rupee exchange rate movement may be calculated using the annualised volatilities and has asked banks to ensure that their policies and procedures for management of credit risk factor their exposure to currency-induced credit risks and are calibrated towards borrowers whose capacity to repay is sensitive to changes in the exchange rate and other market variables. Banks have also been advised to assess their loan pricing policies to ensure that they adequately reflect overall credit risks. 

The central bank came out with draft guidelines provisions and capital requirements on banks at a time when rupee is hovering at life time low level and some Indian companies are likely to incur losses due to their un-hedged foreign currency exposures. In past, the RBI had also issued various guidelines for advising banks to closely monitor the unhedged foreign currency exposures of their corporate clients and also factor this risk into the pricing.   The apex bank has further directed that Banks should calculate the incremental provisioning and capital requirements at least on a quarterly basis. However, during periods of high Dollar-Rupee volatility, the calculations may be done at monthly intervals. This framework may be implemented from October 1, 2013. The CNX Nifty touched a high and low of 5,815.00 and 5,760.40 respectively. 

The top gainers on the Nifty were Lupin up 3.87%, Jindal Steel up 1.40%, Sun Pharma up 1.21%, Ambuja Cement up 0.80% and ITC up by 0.55%.

On the flip side, the top losers of the index were JP Associates down 8.38%, Bank of Baroda down 7.95%, IDFC down 6.06%, PNB down 4.94% and Sesa Goa down by 4.70%.

The European markets were trading in red, France’s CAC 40 down by 1.72%, the United Kingdom’s FTSE 100 down by 1.63% and Germany’s DAX down by 1.71%.

Asian Markets concluded the trade on negative note, as concerns over growth in China’s services sector added the selling pressure. A pair of surveys monitoring China’s services sector showed weak growth for June. The government-sponsored version of China’s services Purchasing Managers’ Index fell to 53.9 for June from May’s 54.3, though it remained above the 50 level dividing expansion from contraction. The HSBC/Markit Purchasing Managers’ Index (PMI) for the services industry inched up to 51.3 last month from May’s 51.2, after growth in new orders hit a 55-month low and business confidence slumped to depths last seen in late 2005 when records began. An increasing show of reluctance by top Chinese leaders to take policy steps to stimulate growth has also raised the chance that China's economic down cycle may turn out worse than thought. Besides, an unprecedented cash crunch in China’s financial markets last month, that saw interest rates briefly spike to record highs, may further drag on the economy in coming months.

Japan’s Nikkei closed in red amid choppy trade, as traders appetites were hit by weakness in other Asian shares and worries about the tepid Chinese economy. Hong Kong's market closed with deep cut, accelerating their losses after the Chinese services PMI data. On the economy front, Hong Kong retail sales grew in May by 12.8% from a year earlier, well below April’s 20.7% growth.

Jakarta Composite too suffered deep cuts after World Bank lowered its forecast for economic growth in Indonesia this year due to a slower-than-expected recovery in exports, a weaker outlook for foreign investment and softer commodity prices. The World Bank now expects Southeast Asia’s largest economy to grow 5.9% in 2013, down from its previous forecast of 6.2% in March.