China rate hike fears spook Dalal St; Nifty ends below 6,000

Heavy sell-off in the Shanghai Composite Index on renewed talk of further rate tightening, spooked the markets on Tuesday, and dragged down the Nifty below the 6000 level and the Sensex below 20000 mark. Both have broken important psychological levels at close for the first time in the last 13 sessions.

It was a complete bloodbath on Dalal Street - especially on very high volumes. All sectoral indices closed in the red on the back of outflow of foreign investors' money.

Arjuna Mahendran, Managing Director of Head Investment Strategy at Asia HSBC Private Bank does not think that we are in the throes of a major slowdown due to the rate hike fears emanating from China and reports of price control in commodities by China. "All we are seeing is the exuberance of the market in the last month that has pushed up a lot of the equity indices around the region to extremely high levels. It is fuelled by massive inflows of western savings into Asian markets. I expect this to last for about three-four weeks and then we will see a continuation of more normal markets. There is nothing really in the fundamentals that worries us," he explained.

"This is just a normalisation of interest rates that are going on around Asia as inflationary pressures pickup, particularly, because of high food prices. That process will continue for the next year. I do not think there is anything to alarm people. It is just that the markets overreached themselves over the last four-six weeks," he said.

China's Shanghai Composite Index closed at 2,894.54, down 3.98% today, pulled down by large cap banking and energy companies' shares. Many local newspapers of China have reported price control in commodities. There are talks of possible government measures to curb accelerating inflation including price controls which may hurt the earnings of commodity companies and property developers.

Talks of post inflation and bank lending data are also doing rounds. Chinese markets have fallen 10% in last four trading sessions on the back of these announcements. Also Bank of Korea's raising rates twice after the global crisis is again a shot in the arm; Korea hiked interest rates by 25 bps to 2.5%.