Economy Panic Under COVID-19, Stocks Crash, RBI Starts Dollar Swipe To Quell Panic

The stock market on March 13 saw over Rs 11 trillion worth of investor wealth wiped out on a day of frenetic trading amid mounting concerns about the state of the world economy and the ability of governments to deal with a snowballing crisis.

The 30-share Sensex opened at 34,472.50, over 1,200 points lower than March 11th close and quickly went into a free fall, plunging over 3,204 points to an intra-day low of 32,493.10. The benchmark index closed 2,919.26 points, or 8.18 per cent, lower at 32,778.14 — the largest-ever one-day plunge.

The Nifty crashed 8.3 per cent to 9,590.15, its lowest close in two-and-a-half years. On March 9th, the Nifty had closed 4.90 per cent down while the Sensex had tumbled 5.17 per cent.

On March 12, State Bank of India was the biggest loser as it tumbled 13.2 per cent, followed by ONGC, Axis Bank and ITC. Top private-sector lender HDFC Bank Ltd caused the biggest damage to the indexes, diving 8.18 per cent to its lowest close in more than a year.

On the inter-bank forex market, the rupee slid by 54 paise to a new 17-month low at 74.22 against the US dollar while the yield on the benchmark 10-year bond ticked up to 6.21 per cent. Brent crude oil futures dropped 5.5 per cent to $ 33.82 per barrel.

President Donald Trump’s decision to suspend travel from Europe to the US for 30 days in an effort to stop the spread of the coronavirus sent the Dow Jones Industrial Average plunging 1465 points on March 11.

Indian investors took their cues from global markets that went into a tailspin after the meltdown in the US. But they were also grappling with the widening fallout from Yes Bank’s debacle that exacerbated fears of a cash crunch for corporate groups as banks start to turn off the funding taps to protect themselves from the scourge of rising bad loans.

Investor panic has increased pressure on the finance ministry and the RBI to devise measures to buoy sentiment with experts remaining sceptical about the monetary and fiscal authorities’ ability to devise a package that would help stem the slide.

“The Indian markets fell more than the other Asian markets today,” said Deepak Jasani, head of retail research, HDFC securities on March 12. “This could reflect higher selling by foreign portfolio investors.” “The risk of a global recession is rising and the markets do not seem to be pricing that in fully,’’ Jasani added, suggesting that there could be more pain in the days ahead.

To come out of the crunch, RBI on March 12 announced a dollar sell/buy programme to provide banks the much needed foreign exchange to stem the freefall of the rupee that has plummeted to a 17-month low of Rs 74.28 at the end of the day on account of the global panic caused by the coronavirus pandemic.

The Reserve Bank sold $2 billion worth of American currency to banks in a bid to infuse liquidity in the domestic forex market roiled by mounting concerns over coronavirus pandemic and crash in global oil prices.

The central bank also stressed it is closely and continuously monitoring the rapidly evolving global situation and spillovers. Also, it stands ready to take all necessary measures to ensure that the effects of the COVID-19 pandemic on the Indian economy are mitigated and financial markets and institutions in India continue to function normally.

The level of forex reserves at USD 487.24 billion as on March 6, 2020, remains comfortable to meet any exigency, the central bank added. The central bank under the swap programme would sell dollars to banks and buy them after six months. The swaps would be conducted through the auction route in multiple tranches. The auctions would be multiple prices based — successful bids were accepted at their respective quoted premiums. The first auction of $2 billion was held on March 16.

”On a review of current financial market conditions and taking into consideration the requirement of dollars in the market, it has been decided to undertake 6-month dollar sell/buy swaps to provide liquidity to the foreign exchange market,” the RBI said in a statement.

The central bank said financial markets worldwide were facing intense selling pressures on extreme risk aversion because of the coronavirus, compounded by the slump in international crude prices and a decline in bond yields in the advanced economies.

The flight of capital from the emerging markets has led to a spike in volatility across all asset classes, with several EM currencies experiencing downside pressures and mismatches in dollar liquidity have become accentuated across the world. The RBI further pointed out that the level of forex reserves at $487.24 billion as on March 6 remains comfortable to meet any exigency.

By

Babita Sharma

Editor, INBA