Mumbai: In a triple whammy, benchmark Sensex and rupee went into a freefall while gold surged as fears of a return to capital control regime haunted investors who remained unconvinced that there would be no further curbs.
The S&P BSE Sensex plunged the most in four years and the rupee plummeted to a record low amid fears that capital controls would return as the government attempts to reduce exchange-rate volatility and stem the burgeoning current account deficit. Gold gained the most in two years.
Investor sentiment was also hit by expectations that an improving US economy would result in the flight of foreign capital from the domestic markets.
The Sensex fell 769.41 points, or 3.97 percent, to 18,598.18, leaving investors poorer by more than Rs 2 lakh crore. The rupee breached 62 for the first time, falling to 62.03 before recovering to close at a record low of 61.65.
Prices of gold, traditionally considered a safe haven for investors, shot up by Rs 1,310, the most in two years, to reclaim Rs 31,000 per 10 grams level in Delhi.
"Weak international cues and rising dollar-rupee rates triggered selling in the Indian equity market," said Nagji K Rita, Chairman & MD of Inventure Growth and Securities. "The rising bullion is now seen by many as a safer bet to park funds. And such a change in sentiment adds further selling pressure on equities as an asset class."
To restrict the outflow of foreign currency, the RBI had on August 14 announced stern measures, including curbs on Indian firms investing abroad and on outward remittances by resident Indians.
The government and the RBI, seeking to calm rattled investors, today said there was no reverting to the capital control regime.
Finance Minister P Chidambaram said the market should not be so sensitive to data flowing from the US.
"When calm is restored in the market, people will begin to understand India market indicators must basically reflect Indian market conditions. They should not be so sensitive to data coming out of the US," Chidambaram said on the sidelines of an event in New Delhi.
Observing that nothing had happened in the Indian economy between Wednesday and Friday morning, Chidambaram said, "Nevertheless, the markets have taken a hit and that is reflected in the rupee also. We have taken a number of measures...A number of measures are being taken. Let's wait to see what the first quarter growth rates are."
A finance ministry official said there are no plans to increase margins on short selling in equities.
Top sources in the Reserve Bank blamed "unwarranted rumours" about controls on FII money for the almost 770-point drop in the Sensex and the rupee dipping to a record low.
RBI sources said India had no record of keeping controls on FII money and the capital outflow measures announced on Wednesday were in no way bringing back the control regime.
The central bank reduced the limit for overseas direct investment (ODI) by domestic companies, other than oil PSUs, under the automatic route from 400 percent of net worth to 100 percent. Higher levels of ODI would now need prior approval from RBI.
"The fear (among foreign investors) is that recent RBI measures may bring capital control measures back in a much bigger way. The markets crashed chiefly because of this," said Gautam Sinha Roy, VP-Equities, Motilal Oswal Securities.
Foreign institutional investors have invested a net Rs 67,693.50 crore (USD 12.7 billion) in Indian equities so far in 2013 and have pulled out a net Rs 27,019.20 crore from the debt segment, according to the Sebi website.
"There is no question of us putting any restriction on outflows which are commercial in nature," Economic Affairs Secretary Arvind Mayaram said in New Delhi. "There is no control of outflows of dividends, profits, royalties or on any kind of commercial outflows which happen in the normal course."
Sources said throughout the history of Indian reforms, not once was it contemplated to control or restrict FIIs taking out their principal or dividend. Under FEMA Act, it would be illegal to stop any such repatriation, they said.
Gold prices jumped to Rs 31,010 per 10 grams, a level not seen since February this year, on strong demand from stockists ahead of the festive season, after the RBI prohibited inward shipments of gold coins, medallions and dores without licence.
This is the biggest single-day surge since August 19, 2011, when the metal had risen by Rs 1,310.
"Gold is back in demand as falling rupee and melting equities left no place for investors to park their funds," All India Sarafa Bazar vice president Surender Jain said.
Restricted supply after the government increased import duty on the metal to 10 percent on August 13 and firm global cues supported the upsurge in the metal, traders said.