Sensex sheds nearly 500 points amid cash crunch

A nearly 500-point slump in the BSE benchmark Sensex took investors by surprise on Tuesday. The domestic market witnessed selling pressure across the board amid a cash crunch following the government's demonetisation move even as most Asian markets traded sideways amid rising fears of a rate hike by the US Federal Reserve.

The US dollar hovered near a 14-year high while treasury yields extended their rise as investors braced for higher inflation in the US amid expectations of fiscally expansionary polices under Donald Trump's presidency.

According to The Economic Times, there were several reasons that triggered the sharp fall in domestic equity indices in morning trade.

Following the demonetisation of high value currencies, analysts and economists warned that the pain of the cash crunch would be felt across sectors for up to six months. Investors dumped consumption and NBFC stocks, while some bank stocks too came under pressure.

"A sudden drop in money supply and simultaneous increase in bank deposits is going to adversely impact consumption demand in the economy in the short term. This coupled with the adverse impact on real estate / construction and informal sectors may bring down the GDP growth rate. However, we feel the impact will be felt more in Q3 of FY17 and the system is expected to readjust thereafter," India Ratings said in a note.

Besides, demonetisation is expected to have a bearing on sectors such as real estate, which have high levels of cash transactions.

The rupee was trading at the lowest level against the US dollar since 30 June 2016. The domestic currency fell 40 paise against the greenback to 67.65 level in early trade. This was in line with a broad rally that the greenback has been seeing even since Donald Trump's win in the US presidential election.

A weak rupee does not auger well for foreign inflows, as any depreciation in local currency eats into profits of foreign investors when they redeem their investments. FPIs have already sold Rs3,175 crore worth of domestic stocks this month following a Rs 4,306 crore worth of selloff in the previous month.

There is also a US Fed hike looming. Ever since Republican nominee Donald Trump won the presidential election in US, the dollar and the US treasury yields are soaring. There are fears that Trump policies will trigger a rise in inflation in the US, which may create ample room for the US Fed to go for more than one rate hike. CME's Fedwatch tool showed traders are pricing in an 85.8-per cent chance of Fed hiking interest rate in December. Money markets are expecting a 23.2 per cent chance of another Fed rate hike by March 2017.

The Nifty50 headed the for 8,120-8,150 range, the region where the 200-DMA and 61.8 per cent Fibo support cluster are expected to offer strong support to the index. The index had been trading below its 50-DMA for the past three sessions and the daily momentum readings are in sell mode.

Data continued showing poor growth in factory output, particularly in the manufacturing sector, in the run-up to the festival season in October was a clear pointer that a recovery in the economy was nowhere in sight, experts said.

Data released on Friday showed the index of industrial production (IIP) grew a modest 0.7 per cent YoY in September. The capital goods segment failed to deliver for the 11th straight month.