1,000 points down the drain in three days

In merely three sessions the Sensex has lost 977.01 points, the sharpest fall after June 2006.

Then, the Sensex had tumbled 1,521.89 points, from 10,451.33 on 2 June to 8,929.44 on 14 June 2006.

The last such major fall was in July 2006, when the Sensex had lost 922.75 points; from 10,930.09 on 12 July to 10,007.34 on 19 July.

A massive fall had occurred in May, when the Sensex had lost 1,736.04 points to 10,481.77 on 22 May from 12,217.81 on 17 May. A lower-than-expected industrial output growth for October 2006 worsened the fall on the bourses today, after the Sensex had lost 400 points on Monday (11 December) following a surprise hike in cash reserve ratio (CRR) by the RBI, which raised fears of another rate hike.

The latest sharp fall will help reduce some of the excesses of Indian bourses like stretched valuations. The Indian bourses are trading at high PE multiple compared to its regional and emerging market peers. The premium valuations it commanded because of strong earnings growth of India Inc as on 11 December 2006, the Sensex’s PE multiple was 22.18 based on the trailing 12-month September 2006 earnings. The PE multiple will fall further following today’s 404-point fall.

The latest sharp fall has occurred after a sharp surge, when the Sensex had risen 10.6% in a short while, to a lifetime closing high of 13,972.03 on 7 December, from 12,623.28 on 23 October. FII buying, on expectations that earnings growth of India Inc will continue, had triggered the solid surge. There was a surge in open interest in NSE’s futures & options segment during this rally, indicating that the market was overbought.

After the latest economic data, market men will now be closely eyeing advance tax payment by corporates for the third installment, which is due on 15 December 2006. The corporate advance tax payment will provide a broad outline of Q3 corporate results. More so given that strong earnings growth has been a key driver of the bull-run on the bourses.

In the near term, US Federal Reserve’s decision on US interest rates remains a principal trigger for domestic bourses. US Fed meeting is due later today, and expectations of interest rates staying unchanged run high. Analysts will closely watch the Fed’s accompanying statement for cues of future rate moves. Investors are waiting to see if the Fed will tone down its hawkish stance in its statement accompanying the decision.

Market men will also be watching FII allocations for India for calendar year 2007