Sliding down the sensex

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Mar. 18: The monsoon is still a few months away. But a different kind of deluge—bad news—dampened spirits on Dalal Street. On Tuesday the Times of India said fears of further losses to Indian banks, a slowdown in corporate growth and the fast-spreading contagion of turmoil in global financial markets took their toll on Monday.

The sensex lost 951 points to close at 14,809. This was its second steepest fall, wiping out Rs 3.2 lakh crore in investor wealth. Since January 10, when the sensex touched its peak of 21,206 points, more than Rs 25.1 lakh crore of investor wealth vanished into thin air.

In glocal news, JPMorgan Chase & Co set a deal to buy stricken rival Bear Stearns for a rock-bottom price, while the US Fed expanded lending to securities firms for the first time since the Great Depression to prop up the financial system.

The shock news, the biggest sign yet of how devastating the credit crisis is for Wall Street, slammed the US dollar to a record low against the euro, pummeled Asia stock markets and boosted gold and low-risk bonds. Spot gold hit an all-time peak of $1,030.80 a troy ounce and was up at $1,022.95/1,023.65 an ounce at 1201 GMT from $996.90/997.70 late on Friday. The precious metal is up by over 50% since last August when credit markets imploded as problems in the US subprime mortgage market hit confidence. Crude oil rose to a record near $112 a barrel as the dollar fell after the US Fed surprised markets by cutting the discount rate by 25 basis points to 3.25%.

The Fed agreed to finance up to $30 billion of Bear’s assets as US treasury secretary Henry Paulson pledged the US government is prepared to do “what it takes’’ to maintain the stability of the financial system. “The fear is how many more skeletons in the closet are still there in the global credit markets?’’ said David Cohen, economist at Action Economics in Singapore.

The bloodbath on the Bombay Stock Exchange, has made the real estate industry jittery too. The property market in most parts of the country is currently witnessing a slump in demand and the precipitous fall in the stock market is now bad news for developers.
Developer Pujit Aggarwal of Orbit Corporation said over the past three months, sales of residential and commercial office space has virtually come to a halt. “I can clearly see a correction in the property market with prices falling by up to 30% in the next one year to 18 months,’’ he said.
According to him, some reputed firms who were in the process of doing up their interiors have not stopped work. “The demand for commercial space—50% of which was driven by financial institutions—has dried up. If the stock market decline continues, places like Thane, Jogeshwari and beyond will see huge corrections,’’ Aggarwal added.

On Tuesday, the Times of India also reported, that one thing is for sure. Over the next few months, investors will have to go through gut-wrenching uncertainty. As more global financial institutions are expected to report losses, subprime or otherwise, foreign funds will continue to sell profitable holdings in Indian markets, which will put pressure on share prices.

Immediate action in the US will continue to affect the local market for other reasons as well. As the US Fed cuts interest rates to bail out its financial institutions, the dollar will lose value against other currencies. Commodities prices, which are denominated in the dollar, will rise to offset this fall. This in turn will drive inflation across the world, forcing central banks to take measures to contain it. That is usually done by raising lending rates to cool off demand. Slack demand slows down industrial growth and affects equity markets.