Equities, currency tumble over weak global cues, J&K decision

The equity and currency markets declined on Monday over heightened trade tension between the US and China, and the political developments in Jammu and Kashmir (J&K).

Union Home Minister Amit Shah earlier in the day proposed to revoke Article 370 of the Constitution which gives special status to Jammu and Kashmir and said the state will be split into two Union Territories: Jammu and Kashmir with an Assembly and Ladakh without one.

Though the markets did not respond to the announcement with any major volatility, the Sensex closed 418.38 points lower at 36,699.84, after trading heavy losses throughout the day. The broader Nifty fell by 134.75 points or 1.23 per cent to 10,862.60.

Market analysts said the Kashmir development was an add-on to the US-China trade tension, which was the main cause of the Monday’s market fall. Global markets came under further stress after China vowed to respond to the US tariffs announced last week.

The Indian rupee too registered a three-month low following the slide in Yaun, which declined below 7 to a dollar for the first time since 2008.

“Multiple headwinds led to the day’s market volatility. Concerns of a political crisis brewing in J&K and no further cues on the exclusion of surcharge for Foreign Portfolio Investors (FPI) added to the market volatility,” said Vinod Nair, Head of Research, Geojit Financial Services.

“Selling was broad-based despite late recovery witnessed in auto and banks, and IT held on to gains due to a weakening rupee. Consolidation may extend given the headwinds in global trade negotiations and the risk aversion strategy adopted by the FPIs,” Nair added.

The investor sentiment is already weak owing to an exodus of foreign funds on account of weak corporate earning results and the controversial super-rich tax proposed in the Budget last month.

Meanwhile, the Indian rupee plunged to a five-month low and bond yields rose sharply on Monday, as an escalating China-US trade spat sent most regional currencies lower while tensions in the disputed region of Kashmir also weighed on investor sentiment.

Asian shares dropped the most in nine months while the yuan broke the 7 per dollar support level amid mounting trade tensions.

The partially convertible rupee was at 70.47/48 per dollar at 0558 GMT after dropping to 70.6050 earlier, its weakest since March 6.

“This downward momentum in the INR could continue this week,” HDFC Bank said in a note.

“We have been highlighting that the INR is at risk of a correction and the trigger has been the US-China trade war. Brace yourself, past trends show that movements in the INR tend to be sharp and quick in such instances.”

The benchmark 10-year bond yield was up 5 basis points at 6.40% after rising to 6.42% earlier. The broader NSE index was down 1.6%.

Traders said the rising tensions in the northern state of Jammu and Kashmir were also a factor being closely monitored apart from the monetary policy committee review on Aug. 7.

Phone and internet services were suspended in Kashmir and state leaders placed under house arrest, deepening fears that Prime Minister Narendra Modi’s government plans to weaken the special rights of residents in the disputed region.

Investors have already factored in a 25 basis point cut in repo rate when the Reserve Bank of India reviews policy on Wednesday.

“RBI rate cut is factored in, so the downside for yields is very limited from here. With the current state of the economy, 25 bp (cut) may not be enough, so the statement will be key for markets,” said the head of trading at a private bank said.

Gold prices in India jumped over 2% on Monday to record levels, following gains in overseas markets and as the rupee fell to a five-month low, dampening demand further in the world’s second-biggest consumer of the precious metal.

Local gold futures hit an all-time high of 36,990 rupees ($524.70) per 10 gram, taking their gains to more than 17% in 2019.

“Demand is negligible due to higher prices. Even after offering hefty discount, consumers are not ready to buy,” said Mukesh Kothari, director at dealer RiddiSiddhi Bullions in Mumbai.

Dealers were offering a discount of up to $36 an ounce over official domestic prices, the highest since August 2016. The domestic price includes a 12.5% import tax and 3% sales tax.

India’s gold consumption dipped 1.5% in 2018 to 760.4 tonnes, below a 10-year average of 838 tonnes, according to data compiled by the World Gold Council.

The council last week forecast consumption to soften in the September quarter as record high local prices curtails buying.

Agencies