S&P Downgrade Warning Triggers Panic Sell-off

Sensex closes the day with a loss of 162 pts despite foreign investors buying stocks worth . 614 cr

Areminder from ratings agency Standard & Poor's that India still stands the risk of a ratings downgrade to junk status sparked a sell-off in Indian stocks and dragged down the rupee on Wednesday. Weakness in European and Asian markets, which tracked the Wall Street declines on Tuesday following International Monetary Fund's cut in global growth forecasts, also weighed on sentiment on Dalal Street. 
India still faced a one-in-three chance of a credit rating downgrade over the next two years, said Standard & Poor's on Wednesday, although the pro-business reforms announced in September have slightly improved the economy's prospects. "The S&P warning is a wake-up call to the market that there is more to a market rally than just sentiment boosters," said UR Bhat, managing director, Dalton Capital. "Stimulating real economic growth requires that several issues such as streamlining resource allocation, reining in fiscal and current account deficits, controlling inflation, creating the confidence for new investments should be addressed soon," he said. 
BSE's Sensex declined 162.26 points, or 0.86%, to end at 18631. NSE's Nifty dropped 52.45 points, or 0.92%, to close at 5,652.15. 
S&P had cut its outlook for India rating to 'Negative' from 'Stable' in April. But, the global rating agency's latest warning did little to stop foreigninstitutional inflows as overseas investors bought shares worth . 613.98 crore on Wednesday, extending their total purchases for October so far to . 8,978 crore. In September, foreign institutional investors net purchased shares worth over . 20,000 crore. Domestic institutional investors on Wednesday net sold shares to the tune of almost . 400 crore. 
Asian markets, barring China, fell 1-2%, while European markets were marginally weak till the time of going to the press on Wednesday after IMF predicted the slowest global growth since the 2009 recession. Investors' focus will now shift to July-September results of top Indian companies starting later this week. Infosys and HDFC Bank are scheduled to announce their second quarter earnings on Friday. While the market expects HDFC Bank's consistent earnings run to continue, Infosys' results will be closely watched. 
"The sentiment for Infosys has remained fairly weak from the guidance point of view for the last couple of quarters. People are entering Friday with a reasonable level of keeping that backdrop in mind," said Rajat Rajgarhia, director of research, Motilal Oswal Securities. "What is more important is that we do not see any change in the core dollar revenue growth for the acquisition that they did," he said. Shares of Infosys fell 1.3% to close at . 2,504 on Wednesday.