“What is the guarantee that more liquidity would have stopped the fall in equity prices?” he asked, adding: “On the other hand adding more liquidity would have added to inflationary pressures and might lead to more problems for the real economy.” “There is liquidity crisis globally and Indian markets are not immune to that,” he said. “FIIS are selling ruthlessly to take out whatever money they can because yen carry trade has gone even more out of hand and they are under tremendous liquidity pressure in their home countries.”

1. Sunday 26th October, 2008
Indian equities markets suffer worst ever losses
IANS Friday 24th October, 2008
It was Black Friday at Indian equities markets as they finished with their worst ever losses in
history both in points as well as percentage terms. Large-scale selling by foreign institutional
investors belied expectations of investors. On top of that, the central bank, the Reserve Bank of
India (RBI), kept all key rates unchanged in its mid-term policy review Friday. Plus, poor global
cues played havoc with Indian markets.
The benchmark 30-share sensitive index (Sensex) of the Bombay Stock Exchange closed at
8,701.07, down 1,070.63 percent or 10.96 percent from its previous close Thursday at 9,771.70
points.
In the past, on Jan 21, 2008 and in May, 2004 immediately after the United Progressive Alliance
coalition government came to power, the Sensex had crashed by 10 percent much before noon
and, therefore, brought trading to a halt by hitting the lower circuit filter.
On those two occasions, after markets reopened, the Sensex had recovered to end only a few
percentage points down.
Of course, there have been record falls during the past few weeks after the collapse of Lehman
Bros of the US on Sept 15, but the erosion at closing Friday was the largest ever in the history of
the BSE, analysts said.
“As far as I can remember this is the steepest fall ever in the history of the BSE in both points
and percentage terms,” said Jagannadham Thunuguntla, head of the capital markets arm of
India’s fourth largest share brokerage firm, the Delhi-based SMC Group.
“Yes, this the biggest ever crash in the BSE’s history,” said Ashish Kapoor, chief executive
officer of Delhi-based Invest Shoppe India Pvt Ltd, a fact that was also confirmed by portfolio
strategist Manoj Krishnan of Delhi based financial services firm Price Investment Management
& Research Services.
In percentage terms, the fall of the broader 50-share S&P CNX Nifty index of the National Stock
Exchange (NSE) was even steeper.
The Nifty closed at 2,584.00, down 359.15 points or 12.20 percent from its previous close
Thursday at 2,943.15 points.
The BSE midcap index finished at 3,095.68 points, down 283.04 points or 8.38 percent from its
previous close Thursday at 3,378.72 points.

2. The BSE smallcap index closed at 3,661.83, down 303.87 points or 7.66 percent from its
previous close Thursday at 3,965.70 points.
All 13 sectoral indices at the BSE ended with losses with the worst hit being realty, oil and gas,
banks and metals in that order.
Not a single stock that goes into the Sensex finished in positive territory. The biggest loser was
DLF Ltd. that ended with a loss of 23.96 percent.
Ranbaxy Laboratories came next shedding 17.83 percent, Hindalco lost 17.82 percent and Tata
Motors was down 16.54 percent.
As many as 2,322 or 88.36 percent of traded stocks declined, only 260 or 9.89 percent advanced
and 46 or 1.75 remained unchanged.
“There was large-scale selling by hedge funds and even by pension funds to protect their assets.
Pension funds normally buy when markets are down,” said Kapoor.
California Public Employees Retirement System or CalPERS, one of the largest pension funds in
the world is an example, Kapoor said.
Analysts were also surprised that the RBI chose to keep lending rates and other key liquidity
ratios unchanged in its mid-term policy review announced Friday.
Religare Securities President Amitabh Chakraborty told IANS: “I’m surprised. I was expecting a
cut in the repo rate and reverse repo rate. I guess the banking sector will see more pressure,”
HDFC chief economist Abheek Barua said: “In this policy financial stability has been the main
priority. RBI has taken aggressive measures already, so now they would wait and watch
depending on the market volatility.”
Thunuguntla also welcomed the RBI move not to add more liquidity because he said the role of
the RBI is to monitor growth and inflation and not to help out the capital markets.
“What is the guarantee that more liquidity would have stopped the fall in equity prices?” he
asked, adding: “On the other hand adding more liquidity would have added to inflationary
pressures and might lead to more problems for the real economy.”
“There is liquidity crisis globally and Indian markets are not immune to that,” he said. “FIIS are
selling ruthlessly to take out whatever money they can because yen carry trade has gone even
more out of hand and they are under tremendous liquidity pressure in their home countries.”
In yen carry trade, hedge funds used to borrow yen denominated loans from Japanese banks at a
negligible interest rate of 0.5 percent and then converted these funds into other currencies and
invested across the globe.

3. So, even if they earned a return of as low as 2-3 percent they still made a profit on those
investments because their cost of funds was only 0.5 percent.
Now with the dollar appreciating against the yen the conversion rate has hit a 13-year high.
Currently the exchange rate is 95 yen to a dollar when a year ago it was 109 yen to a dollar. This
means yen denominated loans have become costlier by almost 15 percent so that the cost of yen
denominated loans is now 15.5 percent against only 0.5 percent earlier.
This is forcing hedge funds with yen denominated loans to repay those loans as soon as possible
and stop losing money. This is the reason they are selling off whatever assets they have,
wherever they have, to repay yen denominated loans.
“The markets are not a proxy for the real economy. When there was 9 percent growth in the last
two years markets grew by 40 percent. Now even if domestic economy grows 7-8 percent
markets have crashed more than 50 percent,” Thunuguntla said.
When there was great global liquidity, FIIs invested in India pushing up the markets, he said.
Now there is no global liquidity so FIIs are pulling out in a hurry.
“I think the RBI’s move not to add further liquidity is, therefore, prudent. The markets will
correct themselves only when the global liquidity situation stabilizes,” he said.
It is also too much to expect that domestic financial institutions with investible surpluses in the
range of $10-15 billion can stem the rot when market capitalization losses are to the tune of
$600-700 billion, he said.
“We enjoyed the benefit of high global liquidity, now we have to bear the other side of the
stick,” Thunuguntla said.
Global cues too were very weak. Both the Dow Jones futures & S&P 500 futures hit the lower
circuit breaker of 7 percent in European markets.
“US indications are scary since once US markets open at 7 pm Indian time these indices will
resume trading and will probably go down further,” Thunuguntla said.
The Nasdaq futures was also down but at 6.5 percent it hadn’t yet hit the lower circuit filter.
Most European markets were down by around 10 percent on news that the UK GDP had shrunk
0.5 percent in the third quarter of this year ending September.
“This is the first time that hard numbers indicating recession in the global economy is coming in
and I am expecting even more bad news in the coming days,” Thunuguntla said.
“I think it wouldn’t be long before some hedge funds and private equity funds begin to report
bankruptcy,” Thunuguntla said.

4. In India, realty firms have begun to default or seek deferment of payments and although realty
prices have still managed to stay at high levels they are likely to come down in this cash crunch
market, the analysts said.
“The sentiment is extremely negative and although this is a good time to buy you must be ready
to wait for at least 2 year or even more before you can think of returns,” Kapoor said.
“This is a very deep cut and recovery may take as long as 3-4 years,” he said.