SKATING ON THIN ICE

Relief rally fails to sustain, Sensex takes a 674-pt knock

Govts and regulators seem to be pulling out every trick in the book to maintain sanity in the markets. But a fresh wave of selling across Asia & Europe proved too daunting for local investors. CRR cut and tightening of exposure margins could now set the tone for Thursday's trading

 SEBI tightened exposure margin norms in the derivatives segment after market hours on Wednesday, in what is perceived as a move towards warding off defaults and curbing volatility. However, market watchers expect a further sell-off on Thursday, on top of the fall of 5-6% of equity benchmarks on Wednesday, indicating that Sebi's move would have a limited impact.
    The weakness in the market was pretty evident on Wednesday morning when equities started taking a reverse turn after two days of relief rally. The 30-share Sensex tumbled 674.28 points, or 6%, to end the day at 10,809.12. The broader 50-share Nifty closed at 3338.40, down 180.25 points, or 5.1%, over the previous close. India was the worst performer in Asia. Capital goods, metal and IT shares were among the worst performers of the day.
    According to brokers, while the cost of keeping open positions have gone up for both bulls and bears in the derivatives segment, it will pinch the long position holders even more as they have incurred heavy losses in a falling market. This may prompt many traders to unwind their long positions, thus accentuating the fall in stock prices.
    According to the Sebi circular, the exposure margin for gross open positions in single stock futures and gross open short positions in stock options will now be the higher of 10% or 1.5
times the standard deviation — an indicator of volatility in a stock — in the notional value of the positions. The higher the standard deviation, the higher the volatility in the stock. Earlier, the margin was the higher of 5% or 1.5 times the standard deviation in the notional value of positions.
    The tightening of margins on gross open short positions in stock options indicates an attempt to force short traders to cover up their positions. But dealers say, traders on the
    short side of the market — in single stock futures as well as stock options — will be in no hurry to cover up their positions as they are sitting on profits because of the slide in stock prices.
    A fresh wave of selling rocked Asian and European markets after Federal Reserve Bank of San Francisco president Janet Yellen said the US was already in a recession. Sales at US retailers fell 1.2% in September, the steepest in three years, as rising unemployment, falling home prices and the crisis in credit markets weighed rattled consumers.
    Key European markets were down 4-7% while the Dow Jones Industrial Average was down 347 points, or over 4% at 2040 IST.
    Back home, brokers said the ongoing crisis in money market mutual funds — with some of the smaller fund houses facing a run on their liquid schemes — was affecting the sentiment in the equity market as well.
    While RBI on Wednesday announced a 100-basis point cut in cash reserve ratio, the response to the move has been mixed.
    "The cut in CRR will infuse liquidity and soften interest rates, which is a requisite to tide over liquidity issues," AMFI chairman AP Kurian said. "The special window introduced by RBI on Tuesday limited the number of commercial banks eligible for availing this facility. Today's directive, providing a 0.5% SLR facility, has removed this restriction enabling almost all banks to avail this facility," he added.
    Market watchers feel if the problem in money market schemes persists, it will eventually spill over to equity schemes without much delay. "I think we could look forward to a repo rate cut by RBI in its policy next week," says Sandip Sabharwal, chief investment officer, JM Mutual Fund. According to Mr Sabharwal, the problem in the money market would affect corporates earnings by way of higher borrowing costs.
    "You cannot look at the stock market in isolation," he added.
    The rescue operation by central banks in Europe continued on Wednesday with the European Central Bank, Bank of England and Swiss National Bank lending a total of $254 billion in their first tenders of the promised unlimited dollar funds. The move helped somewhat cool interest rates for dollar loans in the London money market.
    Our Bureau