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Indian markets shut; attack raises risk premium

A series of deadly attacks in India's commercial capital Mumbai forced a closure of the country's stock and commodity exchanges and drove up its risk premium in international credit markets.

The central bank closed the bond and foreign exchange markets but said it would continue auctions to keep cash flowing through interbank lending markets, which seized up after the global financial crisis destroyed Wall Street banks in September.

The capital markets regulator said the Bombay Stock Exchange and National Stock Exchange will be closed on Thursday after the attacks, which killed 101 people and brought the security forces into two luxury hotels in south Mumbai.

Coming at a time when foreigners have been heavy sellers of Indian assets, the attacks raised fears of a steeper fall in the rupee and a further blow to market confidence.

But as traffic ground to a halt in south Mumbai, where the central bank and several financial institutions are located, it appeared the earliest indications of how anxious investors were would be known only on Friday.

Traders in Singapore said there were no trades in offshore rupee forwards, but Indian stock index futures fell 2.5% in early Singapore trade.

The risk premium for top Indian lender State Bank of India rose. The state-owned bank is a proxy in the debt market for the government, which has no sovereign bonds outstanding.

Credit default swaps, which are insurance-like contracts, on the bank's five year bonds widened 15 basis points to 435 basis points after the attacks.

“Clearly, it will be negative for the sentiment towards India at this point of time, the time when the world is already looking to be highly uncertain in term of its growth prospects,” said Joseph Tan, chief Asian economist at Credit Suisse in Singapore.

“When the equity market actually opens, it could probably be opening down as opposed to the rest of Asia.”

On Wednesday, the 50-share NSE index gained 3.7% as rate cut expectations gathered after China cut interest rates. India's main 30-share BSE index ended up 3.8%.

The rupee closed Wednesday's trading at 49.48 per dollar.

It figures among the weakest currencies in Asia this year alongside the Indonesian rupiah and Korean won, having dropped 20% against the dollar owing to capital outflows and a withdrawal of foreign credit lines from risky markets.

Foreign investors have withdrawn about $13.5 billion dollars from the Indian stock market this year, compared with a record $34 billion from South Korea and $22 billion from Japan.

Currency analysts and traders expect the rupee will weaken sharply when it opens for trading, but they also suspect any weakness will be knee-jerk and fleeting, as it has been during the scores of previous bombings and attacks in India.

“This might give reason for foreign funds to hold inflow for the time being, but the immediate concern will be on the domestic and tourism spending nearing the year-end,” said Enrico Tanuwidjaja, a currency strategist at OCBC Bank.

“The Reserve Bank of India is likely to guard the dollar/rupee on possible spikes.”

Credit Suisse's Tan agreed. “Such terrorist attacks do not have a lasting impact on the market - I don't think it will have a lasting impact on India,” he said. (Reuters)