The half-point rate cut by the Reserve Bank of India (RBI) failed to bolster investor confidence and smother concerns about sagging growth with the Sensex tumbling by 249 points, or 2.94 per cent, to a three-year closing low of 8,197.92. With this, the Sensex is down 1,449.39 points or 15.02 per cent in calendar year 2009 from its close of 9,647.31 on December 31, 2008.

“In my opinion the interest rate cuts are nothing more than a ploy by the government to borrow cheaper for its own borrowing programme,” said RK Gupta, managing director at Taurus Mutual Fund. He said foreign funds were not comfortable with India’s swelling fiscal deficit as tax cuts and a slowing economy hurt revenue. “Foreign institutional investors are selling across the board. It looks as if they are not comfortable with the Indian market,” Gupta said. Foreign funds, who have dumped about $2 billion of stocks this year, were again big sellers on rising aversion to risk amid a gloomy outlook for equities worldwide. This means FIIs have been pulling out $150-200 million daily.

Globally, investors are pulling out money from hedge funds, forcing hedge fund managers to dump assets. At the same time, global banks and insurers are selling assets after amassing $1.2 trillion of credit losses and writedowns since the start of 2007. More recently, fears have intensified about the exposure of Western European banks and companies to deteriorating economic conditions in Eastern Europe.

Domestic institutional investors have been absorbing selling by foreign funds. Yet, at a time of sustained selling by foreign funds, a recovery or stability of the rupee is vital. A weak rupee will dissuade foreign funds from buying aggressively.

... contd.