Tremors from Australia, UK raze Sensex

Key index down 491 points after Indian mkts join global slide, spooked by the first signs of a return to tighter monetary policy & a new bank bailout Our Bureau MUMBAI  INDIAN shares joined a global equities sell-off after the Australian central bank's interest rate increase for the second time this year led to fears that borrowing costs are beginning to climb and governments may withdraw the fiscal stimulus — two key factors that drove corporate earnings last quarter. Royal Bank of Scotland (RBS) Group and Lloyds Banking Group getting another $51-billion bailout from the UK government showed that global banks are not out of the woods yet.      "We expect the government to start pulling back some of its monetary and fiscal stimulus, based on the pace of the recovery," said Alroy Lobo, chief strategist and head-global equities at Kotak Mahindra Asset Management Company, adding, "The market could stabilise near 14,000."      Shares fell across the globe, as investors were spooked by a quarter percentage point increase in rates by the Reserve Bank of Australia. Although, the western world may be far from raising interest rates, the belief that the rebound is not strong enough, and that any end to government stimuli may put a stop to this fragile recovery, pulled down shares. The 30-share Sensex crashed 3%, or 491 points, to close at 15,404.91. The MSCI Asia Pacific Index, excluding Japan, fell 1.6%, and the MSCI Emerging Markets Index was down 1.6% at 896.71. India was the worst performer among key Asian markets on Tuesday, most of which closed 1-2% lower.      Local shares' slide, for the sixth straight session, was led by Hindalco, which posted a 52% fall in quarterly earnings and added that it planned to sell more shares, diluting earnings of current investors. Second-line stocks take severe drubbing  DLF, WHICH may be one of the worst hit if rates rise, crashed 9% to close at Rs 336.55.      "There is some concern about interest rates going up further," says Rashesh Shah, chairman and managing director at Edelweiss Capital. "However, a 10-20% correction was imminent given the run-up in the past few months."      Benchmark indices more than doubled between March lows and last month, as foreign investors armed with cheap funds bought undervalued Indian stocks, pushing valuations to more than 20 times forward year earnings. But the rebound without much job creation is making some believe that it may not be that rosy on the global economic recovery front. The 50-share Nifty closed down 147.80 points at 4,563.90.      Foreign institutional investors net sold shares worth Rs 874 crore, and domestic institutions purchased for Rs 751 crore on Tuesday, according to provisional data.      The Sensex is off 11% from its peak in September, dragged by the telecom sector which is seeing intensifying price war that could erode profitability of most firms. Reliance Communications, led by billionaire Anil Ambani, is down 48% in the past one month and market leader Bharti Airtel is down 31%, making them the worst performers in the index last month.      "The correction will bring valuations into a more reasonable zone,'' says Jyotivardhan Jaipuria, MD and head-India research at BoA Merrill Lynch. "Once that happens, you will see fresh money come in."      The meltdown has been much more severe in second-line stocks, with the BSE Midcap index shedding nearly 14% in the past two weeks. Trading in 453 stocks on BSE were frozen, after there were only sellers in those shares. Similarly, for every one stock that ended higher, four stocks closed lower. The BSE Realty index tumbled nearly 10%.      Investors are worried that the Reserve Bank of India, which has indicated during the latest policy meeting that it was ending easy policy, may even begin to tighten rates.      "With growth and inflation expected to be higher, we now expect 300 bps of tightening in effective policy rates -- through a combination of hike in policy rates and moving the overnight call rate from the reverse repo rate to the repo rate in calendar year 2010, starting January," said a Goldman Sachs note to clients.