It was a perfect cocktail, which led to panic selling on Wednesday, with rising bond yields, rising crude prices and falling rupee wrecking havoc. Weak global cues compounded the problem even further and a cut in excise on petrol, further aggravated the selling. It was carnage across with heavyweights like Reliance diving a huge 6 per cent in trade. The Sensex ended the day lower by 750 points, but, at one stage had plunged as much as 900 points. Here are 4 reasons why there was massive selling in the markets today.
1) Bond yields surge
Bond yields in the US surged on the back of reports that US Fed President Jerome Powell said that they were a "long way" before neutral interest rates. This led to bond yields spiking, with the 10-year yield jumping to as much as 3.21 per cent.
A jump in bond yield, is a danger sign for emerging market stocks, as Foreign Portfolio Investors could dump stocks in favour of the safe and secure bonds.
This was the highest yield on the sovereign bonds since July 2011 and a further surge could put massive pressure on emerging market stocks, especially Indian stocks.
The emergence of new data also suggested that the US economy was on a strong wicket, which pushed bond yields higher.
2) Rupee hits a new record low
The rupee hit a new record low as emerging markets currencies came under severe pressure, following a strong US dollar. The rupee plunged to a new low of 73.80 to the dollar, though some intervention by the RBI may have resulted in support for the currency.
The Indian rupee was last seen trading at 73.65 to the US dollar. Forex experts believe that we could see some huge capital outflows from Foreign Portfolio Investors which could put some more pressure on the currency.
Many experts believe that one may see Rs 74 on the dollar shortly.
3) Interest rate hike by the RBI
The Reserve Bank of India has begun its 3-day Monetary Policy Committee meet. A decision on interest rates is likely. It is widely believed that the country's central bank would hike interest rates by 25 basis points.
However, with the rupee now plunging to a new record low of 73.80 to the dollar, it would not be a surprise to see the RBI hike rates by 50 basis points as well. The bond markets are probably factoring in a 25 basis points hike.
Another hike of 25 basis points in December, also looks a certainty.
4) Crude prices surge
Rising crude prices were also partially responsible for the crash in the markets. Rising crude tends to sentimentally and fundamentally impact the rupee movement.
Brent crude prices surged past the $86 per barrel mark, which pushed the rupee lower and led to a fall in the markets.