Sensex drops 604 points as Fed rate hike worry looms

On Friday, US shares had fallen around 1.5 percent as strong employment data for February prompted speculation that the Fed may hike rates ahead of schedule.

Expectations of a rate hike could lead to more funds flowing into US treasury bonds in the coming days, which in turn could mean less money flows into emerging markets.

“Emerging market equities face but a dominant theme has been for the past several quarters and is likely to be for many more quarters to come is the strength in the US dollar because we are living in a world where the recovery is very asynchronous,” said George Hoguet of State Street Global Advisors in an interview to CNBC-TV18 today.

“In the short-term at least I would say the outlook is not particularly positive for emerging market equities,” he said.

While India’s currency is in a far better shape compared to other emerging markets, its equities look expensive as earnings growth has been weak and could remain that way for at least another couple of quarters.

“I think despite legislation (passing of key Bills), the market will come under pressure because of earnings,” said Sandeep Bhatia of Kotak Securities in an interview to CNBC-TV18 today.

“I don’t think anyone is stopping capacity expansion because they don’t have land in the near-term, there is enough land available, it is a question of demand,” he said.

European stocks traded lower, following falls in Asia and a drop on Wall Street on Friday after the US jobs data. Britain's FTSE lost 1.4 percent and France's CAC & Germany's DAX fell 0.4-0.7 percent (at 16 hours IST). The US economy added 2,95,000 new jobs in February - more than forecast - and the unemployment rate fell to a more than 6.5-year low of 5.5 percent from 5.7 percent in January.

The BSE Bank, Capital Goods, IT, Metal, Power and Realty indices were down 2-3 percent.

ICICI Bank, Axis Bank, Sesa Sterlite, Tata Power, BHEL, GAIL, Hindalco Industries, NTPC and Larsen & Toubro were prominent losers on Sensex, down 3.5-5.5 percent.

Infosys, HDFC Bank, ITC, Reliance Industries and HDFC lost 2-3 percent whereas Hindustan Unilever outperformed, up 3.4 percent. Sun Pharma and Dr Reddy's Labs gained more than 0.6 percent.

Ranbaxy Labs climbed over 1 percent to end at record closing high of Rs 815.90 after the Sun Pharma-Ranbaxy merger received the last approval. Punjab & Haryana High Court today approved the merger of both companies.

Jindal Steel spiked 4.8 percent after its power generation unit Jindal Power won Tara coal block in Chhattisgarh for Rs 2,103 crore.

The BSE Midcap Index was down 1.3 percent and Smallcap lost 0.92 percent. Declining shares outnumbered advancing ones by a ratio of 2:1 on the Bombay Stock Exchange.