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Indian stocks recover after plunge halts trade

They said that statements by the central bank, the finance ministry and market regulator that any payment problems linked to the plunge would be handled by asking commercial banks, helped restore confidence.

The benchmark 30-share Mumbai stock exchange index closed down 456.84 points at 10,481.77 after it fell an intraday record 1,111.71 points to 9,826.9 before trading was halted for an hour in early market action.

The rival National exchange’s 50-share index, known as the Nifty, fell 289.6 points or 10 percent to 2,896.45 before the halt was called and closed down 165.55 or 5.10 percent at 3,081.35.

Losers led gainers 2,109 to 236 on volumes of 39.84 billion rupees (872 million dollars).

“Domestic funds bought large and mid-cap stocks at lower levels on re-opening early afternoon,” said an analyst with an equity research firm on condition of anonymity.

Monday’s trade followed a fall led by retail investors that saw the Sensex lose 12.3 percent in the previous six trading sessions, which prompted some funds to think it was a good time to buy.

“Some of the funds were seen bottom fishing after the market re-opened. We still are concerned about the liquidity position relating to futures contracts over the next two days,” said Naresh Garg, chief investment officer at Sahara Mutual Fund referring to the end of the May futures contract.

The sharp fall however raised some concern that investors who borrowed to buy shares, or bought stocks via futures contracts, in the past few months may have trouble making payments.

As the market falls, the pressure on investors to make good their position increases and can become a vicious circle as investors try to limit their losses.

However, the market regulator, the Securities and Exchange Board of India, sought to assure investors not to panic.

“There are no reasons to worry. There is no liquidity problem,” securities chief M. Damodaran told reporters in Mumbai.

Finance Minister P. Chidambaram also intervened, telling reporters there was “no problem with liquidity. I have spoken to the Reserve Bank of India today.”

He added that economic “fundamentals are strong” and “my advice for retail investors is to stay invested. Mutual funds are buying. (Foreign funds) have invested for the long-term. There is no reason for any panic.”

The Reserve Bank of India (RBI), the country’s central bank, said it would ensure that commercial banks had enough funds to meet any large payment demands via banks or brokerages.

“In light of the developments in the stock exchanges, the RBI has been in touch with major settlement banks and both the major stock exchanges to ensure that the payment obligations on the exchanges are met smoothly,” the RBI said in a statement.

The last time trading was halted on the exchanges was on May 17, 2004, after the markets plunged in reaction to a general election which brought the Congress party to power with communist allies.

The share market has been a highlight of India’s business success story as the economy grows quickly and small investors and foreign and domestic funds poured money into Indian equities in the past year.

In 2005, overseas funds invested 10.7 billion dollars and the latest data showed the trend continued into the first half of 2006 at 4.3 billion dollars as of last week.

Domestic mutual funds also invested heavily -- 15 billion rupees (333 million dollars) in the past two months -- as retail investors joined the rally which saw the Sensex gain more that 30 percent since the start of the year to early May.

The rupee weakened against the dollar to 45.6 from 45.4 last week and strengthened marginally against the euro to 58.1, compared to 58.3.