Investors ride roller-coaster across markets: Economic Times: 5th November 2008

The financial markets had gone berserk in the last two months following the financial crisis which erupted in the US with the fall of Lehman Brothers and Merrill Lynch. The Indian markets went into a spin and all segments got affected, which culminated with RBI stepping in to lower the CRR and repo rates as there was a liquidity crunch with repo subscriptions touching Rs 90,000 crore on a regular basis. The domestic stock markets felt the repercussions of the US crisis as the FIIs started selling. This, combined with the rising trade balance, caused the rupee to fall. Meanwhile, the Fed’s assurance and the US treasury’s resuscitation measures brought cheer to the US markets with the dollar strengthening, which in turn put pressure on the rupee again. The RBI intervened to supply dollars which depleted the reserves further by nearly $40 billion in these two months. The squeezing of liquidity on this score combined with news of a possible scare on a bank, led to panic that raised interest rates as liquidity dried up with mutual funds also queuing up for redemptions. Relief came in the form of RBI intervention in several quick steps which have sort of restored some order. Meanwhile, with the dollar strengthening, the price of gold and silver fell in the global market and the signs of a recession in the US led to crude oil rapidly lose ground. In this set-up, all markets exhibited some crazy levels of volatility. The call market witnessed the highest annualised volatility of 349% as the Mibor ranged between 6.07% and 20.3% during these 2 months. The continuous speculation of RBI action and a tepid response followed up by a series of CRR and repo rate cuts created this volatility in end-September and first half of October. This really means that a bank which had enough liquidity could have made a lot of money by trading this volatility. The second most volatile market was the stock market, with the Nifty exhibiting a level of 63%, as the index slid from 4504 to a low of 2524 and then recovered. The continuous FII withdrawal of $7 billion added to this slide as other players took similar steps. The third volatile market was quite unrelated to the crisis per se directly, as crude oil continued its descent from above $120 to the region of $ 60/barrel. With volatility of 52% in these 2 months, it was a very hot investment option though it would have been more of a bear market. The fourth most volatile market was the market for bullion with gold displaying a volatility level of 35% and silver with 43%. This was a direct consequence of the strengthening of the dollar as bullion is considered to be a substitute for the dollar and investors switch from one to the other easily. A stronger dollar made more sense resulting in silver showing a min-max variation of Rs 4400/kg while silver had a range of Rs 2800/10 gms. The government security market (as shown by the NSE GSec total returns index) was relatively less volatile, but thanks to the interest rate gyrations, had a volatility of 21% which is over twice of its historical average of 8-10%. Lastly, the rupee-dollar rates was relatively subdued at 13.5% mainly due to RBI intervention which ensured that the daily variations were kept under check and while the RBI reference rate did cross Rs 50/dollar, it has been kept within a range of Rs 48-50 most of the time. The revelation really is that this is probably one of the rare occasions when all sections of the financial markets have been volatile, and there were really opportunities for investors who were willing to take the risk. However, as the gyrations were in both directions, it would have been difficult to guess the direction and magnitude of change with the RBI actually controlling the strings - the fact that it has intervened in the market when least expected in both the money and forex market, means that game, set and match really goes to the monetary authority.