Benchmark indices plunged in trade today, as a number of factors weighed on the markets in tandem. All technical levels were breached with the Nifty comfortably below the 11,000 points mark. It was a fifth straight day of losses, in which the Nifty cumulative losses on these 5 days was almost 6 per cent. The Sensex ended the day with losses of 536 points at 36,305 points. Here are a few reasons the markets saw massive selling pressure.
IL&FS rot may spread
Investors were worried that the IL&FS rot may spread to NBFCs and banks. IL&FS has huge debt and defaulted on its debt payments. The group's finance companies have missed their payments, and the group may need cash to tide over the crisis.
LIC is the biggest single shareholder and is now increasingly being used to pump money. The institution already picked a stake earlier in IDBI Bank.
Many observers believe that with the huge level of debt, IL&FS cannot be allowed to fail. This could have a cascading impact on banks and non banking financial services companies.
The group is now looking at selling some assets to tide away the crisis.
The rupee plunged 50 paise in trade to 72.70 against the dollar, after having closed at 72.20 on Friday. Persistent weakness in the rupee, tends to impact Foreign Portfolio Investors (FPIs), who hate volatility.
In fact, they have been selling shares on worries that in dollar terms their portfolio value may reduce.
It would be interesting to see the net sale in the cash markets today by FPIs given the huge fall. It is possible that we may see some more pressure on the rupee, as month end demand is always high.
Crude oil prices rises
Crude oil prices continued to rise after Saudi Arabia and Russia rebuffed a demand from US President Donald Trump to reduce prices. Petrol prices in Mumbai are already retailing at above Rs 90 per litre, hitting consumers really hard.
There are worries that the RBI may hike interest rates faster than expected the way crude prices and the rupee are behaving. This led to some massive unwinding in stocks, which saw the Nifty dive below the 11,000 points mark.
If crude prices continues to rally in the present manner, there could be an even 50 basis points hike by the RBI in interest rates in FY 2018-19.
Trade tariff worries
The worries over trade tariffs continued to play on the mind of investors. The latest round of tariffs on China by the US, kicked-in from today. Donald Trump's administration levied tariffs of 10 percent on $200 billion of Chinese products that include furniture and appliances, with the rate set to increase to 25 percent by year-end.
The latest round of tariffs targeting U.S. and Chinese goods went into effect Monday, raising the stakes in an escalating trade war between the world's two largest economies.