Biggest scare since 2 April 2007

The BSE 30-share Sensex's 541.74-point, or 3.4%, decline to 15,234.57 is its biggest rout in a single trading session in nearly four months.

The previous biggest point fall in Sensex had occurred in early April 2007. The Sensex had tumbled 617 points on 2 April 2007 following the Reserve Bank of India (RBI)'s surprise hike in interest rates announced after trading hours on 30 March 2007. RBI had raised its short-term lending rate, the repo rate, by 25 basis points (bps) to 7.75%. It had also raised its cash reserve ratio (CRR) by half a percentage point.

On 27 April 2007, the Sensex had witnessed a big fall of 320 points when feeble Asian markets weighed on domestic bourses.

Today's fall was triggered by a setback in Asian markets. Stocks across Asia fell today, 27 July 2007, after the US market dropped 2.3% on Thursday, 26 July 2007, on signs of further weakness in the US housing market and deteriorating conditions for corporate buyouts. Key benchmark indices in Hong Kong, Japan, South Korea, Singapore and Taiwan were down between 2.4% to 4%

The fall was broad based. All the sectoral and niche indices on BSE ended in the red. The market breadth was weak: 1,951 shares declined on BSE as compared to 570 that rose, while 55 were unchanged. Losers outpaced gainers by a ratio of 3.4:1.

The fall materialised after a recent solid surge as FIIs stepped up buying on strong Q1 results and in anticipation of good results from companies which were yet to unveil their numbers. Ths Sensex had gained 5.5% in the past one month and nearly 42% in the past one year.

The top losers from small-cap and mid-cap space were Sterling Biotech (down 11.8% to Rs 173.60), Tele Data Informatics (down 10.8% to Rs 61.45), NIIT Technologies (down 9.7% to Rs 491.10), Wire & Wireless India (down 8.2% to Rs 57.50), Bombay Rayon (down 8% to Rs 202.70), Emkay Share & Stock Brokers (down 9.5% to Rs 99), KS Oils (down 8.9% to Rs 52.70), Energy Development Corporation (down 7.9% to Rs 58.20) and Nectar Lifesciences (down 7.9% to Rs 227.65).

Select stocks, however, rose in an otherwise weak market: Venky's (India) (up 16% to Rs 175.25), Timex Watches (up 10% to Rs 29.70), Triveni Engineering (up 9.7% to Rs 57.15), Assam Company (up 6.5% to Rs 17.80), JK Tyres (up 5% to Rs 147.95), Ballarpur Industries (up 7% to Rs 131.65), and Alok Industries (up 5.5% to Rs 67.65)

Turnover surged on BSE to Rs 6,593 crore compared to Thursday's Rs 5,758 crore

The key event next week is the review of the monetary policy by RBI on Tuesday, 31 July 2007. RBI is likely to keep rates steady. However, it remains to be seen whether the central bank will raise CRR to suck out excess liquidity in the banking system.

Data released today, 27 July 2007, showed India's wholesale price index rose 4.41% in the 12 months to 14 July 2007, higher than the previous week's 4.27% due to increase in food prices

Meanwhile, a development that could increase domestic liquidity is the approval given by the Cabinet Committee on Economic Affairs on Thursday, 26 July 2007, to public sector companies enjoying Navratna and Miniratna status to invest up 30% of their surplus funds in equity mutual funds. The total surplus of central PSUs in 2005-06 was estimated at about Rs 2,39,500 crore, according to public enterprises survey. This means that about Rs 70,000 crore may flow to equity mutual funds. However, investments would be allowed only in public sector mutual funds.