The Indian stock market dropped on Monday amid a sharp decline in the shares of Credit Suisse and UBS as investors weighed the potential impact of the rescue deal.
UBS Group’s agreement to buy rival Credit Suisse did little to assuage fears about the global banking crisis — first triggered by the collapse of US-based Silicon Valley Bank. Investors dumped risky assets and commodities to move to safer assets like bonds and gold.
The Sensex slumped as much as 905 points in intra-day trade, but recouped two-thirds of the losses to close at 57,629, down 361 points, or 0.62 per cent, from the previous day. The Nifty, after briefly slipping into correction territory, recovered 160 points from the day’s low to close at 16,988, with a loss of 112 points, or 0.65 per cent. The sharp bounce from the day’s low was aided by a recovery in European markets.
Foreign portfolio investors continued to dump domestic equities and sold shares worth Rs 2,546 crore, while their domestic counterparts provided buying support to the tune of Rs 2,876 crore.
The US markets, on the other hand, moved higher in the early hours of trade as the UBS-Credit Suisse deal seemed to calm some jitters and traders raised bets of the US Fed likely hitting a pause on rate hikes to ensure financial stability.
“Everyone is thinking about who is next. It has moved from the US to Europe to now Asia. And there are questions about Credit Suisse, like what happens to the firm and how many people will be left?” said Andrew Holland, CEO of Avendus Capital Alternate Strategies.
“Everyone is looking over their shoulders. And that will keep markets jittery,” Holland added.
Central banks and financial policymakers in the western world are taking steps to boost the confidence of investors amid fears of contagion risks. An alliance of the Federal Reserve and five other central banks announced coordinated efforts to boost liquidity in the global financial system.
Investors are trying to gauge how the banking crisis will influence the Fed’s rate hike decisions. Some experts see the current banking crisis a painful start to the end of the bear market in the US. Investors will be tracking the March 21-22 meeting of the Fed.
Apart from the Fed’s policy announcement investors will be tracking ECB President Christine Lagarde’s statement before the European Parliament’s economic committee, and US Treasury Secretary Janet Yellen’s Senate subcommittee hearing on Wednesday. The Bank of England and Swiss National Bank will announce their rate decisions this week.
Some see a silver lining in the banking crisis.
“With the Fed injecting liquidity and adopting a more dovish monetary policy stance, it is probable that the Reserve Bank of India will adopt a similar strategy. Therefore, the outlook for the country’s interest rate environment is more optimistic than earlier. The failure of two US banks has no material effect on the earnings outlook of Indian publicly traded companies. Besides, the anticipated decline in interest rates, including bond yields, would reduce the discounting rate on future earnings of companies, which would have a positive effect on the valuation of Indian equities,” said a note by Anand Rathi Research.
However, it is difficult for the markets to escape near-term volatility. The India VIX index shot up 8 per cent to close at 16. The broader markets were weak with 2,571 declines and 1,072 advances.