Mumbai: India’s benchmark stock indices tumbled the most in more than four years and the rupee slumped to another record low on Friday on concerns that the US Federal Reserve (Fed) may be getting ready to withdraw stimulus measures, coupled with domestic economic worries.

Investors are worried that the Reserve Bank of India’s (RBI’s) measures to tighten liquidity and curb foreign exchange outflows to protect the rupee may hurt corporate growth. Signs of improvement in the US job market and rising consumer prices in the world’s biggest economy bolstered expectations that the Fed will start winding down its stimulus programme next month.

The 30-share Sensex, BSE’s barometer, fell 769.41 points, or 3.97%, to 18,598.18 points, a level last seen on 26 June. The 50-share Nifty of the National Stock Exchange (NSE) fell 234.45 points, or 4.08%, to 5,507.85 points, the lowest since 10 April, and was the biggest loser among all key Asian indices on Friday. In terms of absolute points, it was the biggest fall for both indices since July 2009.

“This is just the beginning of a bear market," Shankar Sharma, vice-chairman and joint managing director of First Global, said in a phone interview from Dubai. “The bull run that had started in 2003 has now ended."

The outlook for the stock markets remains shaky, as indicated by a sharp rise in the volatility index, or VIX, on NSE, which surged 26.42%—the highest in nearly five years. VIX is a widely tracked gauge of expectations of volatility in stock markets in the near term.

Foreign institutional investors invested a net $185.7 million in Indian equities in the first fortnight of August, after selling a net $1.8 billion and $988 million of such investments in June and July, respectively. Owing to strong inflows in the January-March quarter, foreign investors are still net investors to the tune of $12.5 billion in Indian shares in the year to date.

The rupee continued its free fall to test a new record low of 62.01 against the dollar. The local unit later closed at 61.71, down 0.43%. Since January, the rupee has lost 10.88% and is the worst performing unit among Asian currencies at the close of trading on Friday.

“The fall in the rupee essentially underlines weakness in the economic fundamentals," said Naina Lal Kidwai, president of industry body Federation of Indian Chambers of Commerce and Industry.

Currency dealers said the rupee’s fall was arrested by suspected intervention of the central bank in the forex market. RBI intervened by selling dollars to shore up the rupee, they said.

The yield on the 10-year benchmark bond, too, rose to a five-year high of 8.895% as foreign investors liquidated their investments. This level was seen last on 27 August 2008. Foreign investors have offloaded a net $4.9 billion of Indian debt in the year to date, most of it in June and July.

RBI earlier this week unleashed a barrage of measures that included limiting the ability of Indian companies to invest abroad and lowering the cap for individuals to remit money overseas, after tightening liquidity last month to prevent speculative attacks on the rupee.

Experts are sceptical about the impact of these measures to support the currency. Financial markets were also spooked by fears of more measures by the central bank to curb forex outflows.

“The cost that we are paying as an economy for the stabilization of the rupee is too high, because it has not helped the rupee as much, but has harmed the economy," Rashesh Shah, chairman of Edelweiss Financial Services Ltd, said in an interview with Bloomberg TV India. “Currency is a fight that very few central banks in the world have been able to conquer."

The government and RBI tried to allay investor concerns and talk up the markets.

The agency report also cited unnamed people in the central bank as saying that fears of controls on foreign investors stemmed from “unwarranted rumours". India has no record of keeping controls on foreign institutional investors, the report said.

Earlier this week, the government allowed foreign investors more play in the debt market, announced a proposal to sell infrastructure bonds overseas, and increased the import duty on gold. Gold imports have been putting pressure on India’s widening current account deficit, which stood at 4.8% of gross domestic product in 2012-13, and added to pressure on the rupee.

RBI imposed controls on outbound remittances of resident Indians to $75,000 from $200,000 earlier, and reduced the amount of money a company can invest abroad by three quarters.

“The measures will take at least two months to yield desired results," said Pramit Brahmbhatt, chief executive of Alpari Financial Services (India) Pvt. Ltd.

RBI also freed up deposit rates for non-resident Indians and allowed banks to offer any rate they choose. Finance minister P. Chidambaram expects the measures taken to bring in $11 billion this fiscal year. Adding further measures, foreign currency flows should improve.

The optimism is shared by some. In a research note dated 15 August, Bank of America Merrill Lynch economist Indranil Sengupta said the measures should be able to fetch a total of $15 billion.

Foreign brokerage firms have been bearish about the outlook for Indian equities in recent weeks. On 12 August, Nomura cut its March 2014 target for the Sensex to 20,000 points from 21,700 earlier.

“...we find that not only does growth remain weak across sectors of the economy, its momentum has ratcheted down further over the past few months," Nomura analysts Prabhat Awasthi, Nipun Prem and Sanjay Kadam said in their note.

On Friday, gold prices rose in the domestic market by 4%—the highest daily rise in at least two years—after the restrictions on the import of gold and the hike in import duty. At 7.30pm, domestic gold prices were trading at ₹ 30,644 per 10gm, up 4.05%, or ₹ 1,193, from the previous close, while international gold was trading at $1,367.91 per troy ounce, up 0.12% from the previous close.

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