Indian stocks dropped 4.1 percent and the rupee slid on Monday as a poor monsoon season and global wariness over the strength of an economic recovery triggered worries that foreign investors would retreat from the country after fuelling a recent rally.
The rupee INR=IN weakened past 49 per dollar, driven by fears of foreigners withdrawing their stock market investments if growth slowed sharply, while government bonds were subdued as dealers awaited details of an auction due later this week.
"The feeling that the worst is not over for the world is looming large in the minds of investors," said Arun Kejriwal, strategist at research firm KRIS.
"If I had money to invest, looking at the state the world markets and India is in , I would wait for some time. There is no hope for a major rally in the next two to three months."
The main share index .BSESN opened weaker after Asian markets wobbled and lost ground as investors dumped frontline stocks across sectors after sharp gains in recent months.
The 30-share BSE index ended down 4.07 percent, or 626.71 points, at 14,784.92, its lowest close since Aug. 17 and largest drop since July 6.
Indian shares underperformed the 3.82 percent drop in the MSCI Asia ex-Japan index .MIAPJ0000PUS.
Energy giant Reliance Industries (RELI.BO) shed 4.7 percent to 1,939.60 rupees, top listed realty firm DLF (DLF.BO) dropped 7.8 percent to 364.40 rupees and private-sector lender ICICI Bank (ICBK.BO) fell 5.3 percent to 704.85 rupees.
Monsoon rains in India, Asia's third-biggest economy, are 29 percent below average since June 1, raising concerns of weaker farm output, a big component of domestic demand. A bad monsoon could knock as much as 2 percentage points off growth in the current fiscal year, economists have said.
Growth has slowed from rates of near 9 percent seen in recent years as the global crisis derailed exports. The economy expanded at 6.7 percent in 2008/09.
"We still expect the economy to bottom out end-2009. Yet, the ride will be bumpier than we thought. Let's face it: India faces severe drought," Bank of America Merrill Lynch analyst Jyotivardhan Jaipuria said in a note to clients.
Poor monsoons threaten to hurt sales of consumer goods, two-wheelers, tractors, textiles and beverage industries.
"Agriculture growth is likely to turn negative, which will pull down GDP growth from our previous estimate of 6.5 percent to around 5.8-6.2 percent in the base case, down to 5.5 percent in the worst case," Saugata Bhattacharya, an economist at Axis Bank (AXBK.BO), said in a recent note.
Capital inflows into stocks are a key support for the market and the rupee. Foreign investors were seen selling heavily in the real estate and metal counters on Monday, traders said.
The main share index leapt almost 92 percent from a 2009 low in early March through Friday, after slumping by more than half in 2008, and was up about 60 percent on the year, stoking worries about rich valuations. The index is the fourth-best performer among major indices in the world this year and trades at 17.2 times expected earnings, higher than other emerging markets such as South Korea, Brazil and Indonesia which trade at a multiple of 12-14.
Foreign investors have bought $7.56 billion worth of shares so far in 2009 after selling more than $13 billion in 2008.
The rupee posted its biggest one-day drop in five-and-a-half months on Monday, briefly falling below 49 per dollar, while state-run banks were sporadically seen offering dollars, likely on behalf of the central bank to cushion the rupee's fall.
The partially convertible rupee ended at 48.955/965 per dollar, 1.5 percent below Friday's close of 48.24/25.
Bond trading was largely rangebound and yields were propped higher after a finance ministry official said the government had no plans to go slow on its borrowing schedule for the first half of 2009/10. See [ID:nBOM440614]. Prices move inversely to yields.
The benchmark 10-year bond yield IN069019G=CC ended at 7.08 percent, up from the day's low of 7.04 percent. On Friday, it had closed at 7.11 percent.
Cash conditions in the money market were ample with overnight rates INROND= quoted at 3.2-3.3 percent, around the floor of the money market corridor, and the central bank mopped up 1.14 trillion rupees at its daily money market operations.