MUMBAI (Reuters) - Indian financial markets tumbled on Monday as investors ran for cover in the face of the global financial crisis, knocking shares to their weakest level in three years and the rupee to a record low.
Money market rates rose sharply ahead of a holiday and as the central bank intervened in currency markets to support the rupee.
Signs of a looming global recession and slowing corporate earnings heightened investor risk aversion across Asia, helping send India's benchmark index down as much as 11.5 percent at one point and stoking worries that ebbing foreign capital would drag the rupee down still further.
Shares in India's biggest bank, State Bank of India, plunged to a 1-½ year low on worries over bad debt provisions.
Its second-quarter net profit beat forecasts by rising 40.4 percent from a year earlier, but its shares ended down 8.6 percent after the bank ramped up its provisions for bad debts almost fourfold compared with the previous quarter.
"It seems like a ball has fallen from the top of a tower and is on its way down and is gathering pace but has not yet reached the bottom," said Sanjeev Patkar, head of research at Dolat Capital Markets in Mumbai.
"How much of this is speculative and how much of this is forced liquidation remains to be seen but this selling is having a multiplier effect and we will see some more of this in the coming days before it recovers."
The 30-share index fell below 8,000 points to its lowest level since October 2005 before recovering some ground to end down 2.2 percent.
It has lost 58 percent so far this year, the worst performer in Asia in 2008 after China, Hong Kong and Vietnam, as foreign investors have sold emerging market assets and repatriated their funds.
The index rose 47 percent in 2007 when foreigners pumped in a record $17.4 billion. Outflows so far this year are $12.3 billion.
The partially convertible rupee , whose fortunes are closely tied to foreign flows in and out of the stock markets, slid to a record low of 50.24 per dollar, even though traders reported central bank intervention to prop it up.
The currency could fall to 52.5-54.00 per dollar by the end of the year as capital is drained from the country and pressure builds on the trade deficit from falling exports, Kotak Mahindra Bank said.
Interbank overnight lending rates jumped above 9 percent from 6.00/6.25 percent on Friday, well above the central bank's main short-term lending rate of 8 percent, but below 23 percent hit earlier this month.
Like many central banks around the world, the Reserve Bank of India has been pumping record amounts of liquidity into its money market to try to keep credit flowing.
It has slashed banks' reserve requirements to free up cash and a week ago knocked 1 percentage point off its key lending rate to try to bring stability back to India's markets, strained by capital outflows, intervention and banks' reluctance to lend.
On Monday, it pumped 218 billion rupees ($4.4 billion) into its morning money market operations to oil the wheels of the credit markets but rates remained elevated as banks borrowed heavily ahead of two market holidays this week.
"Due to the holidays banks are borrowing as much as they can now and also the central bank has been selling dollars, which is squeezing rupee liquidity," a dealer with a foreign bank said.
Bond and money markets are closed on Tuesday for a local holiday. Stocks will trade briefly in the evening.
The central bank opted not to follow last Monday's surprise rate cut with another one at a scheduled review on Friday, a decision which disappointed bonds and sent yields up.
But yields eased again on Monday as expectations rose that falling commodity and oil prices might persuade the central bank it has room to ease policy again.
The 10-year benchmark bond yield fell 19 basis points to 7.61 percent.
"In the current global and local settings, the RBI should be putting more policy easing in place, because it has that flexibility and because the economy is screaming for it," Rajeev Malik, economist at Macquarie Securities, said in a note.
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