A severe squeeze in liquidity in the domestic and the global markets over the last one week helped bears to make a killing on Monday, as they anticipated little buying support even at lower levels, said dealers.

The bears, who bet on falling prices, sold heavily to drive down prices and created a sense of panic among retail investors. They knew that investors' money is blocked in applications (refunds could take 15 days' time) for the initial public offer (IPO) of Reliance [Get Quote] Power. Also, foreign funds are hit by the global credit squeeze due to the US credit turmoil.

Normally, when the market plunges beyond certain levels, smart money moves in to buy at lower levels. However, on Monday, this was not seen leading many to believe that there is a shortfall in liquidity.

Sanjay Sinha, chief investment officer at SBI [Get Quote] Mutual Fund said: "The obstruction in leveraged money flow from overseas banks to FIIs and the mega IPOs have caused a hole in the markets."

Adds Seshadri Bharadhan, director, stock broking at Dawnay Day AV, a registered FII: "The Sensex was touching new highs recently mainly because of excess liquidity. However, the markets seem to have tanked as the two IPOs sucked a major portion of the liquidity from the secondary market."

In Reliance Power alone, retail investors placed bids for Rs 44,000 crore (Rs 440 billion) and FIIs made bids for Rs 408,150 crore (Rs 4,081.50 billion). As FIIs could bid for paying 10 percent upfront, still the amount works out to be substantial Rs 40,810 crore (Rs 408.10 billion). This is well above the total net sales by FIIs in the cash market this month of Rs 13,300 crore (Rs 133 billion).

With Emaar MGF's IPO of Rs 7,000 crore (Rs 70 billion) opening in February, dealers expect more squeeze locally.  For Future Capital, the other IPO that closed last week, the foreign funds submitted bids for Rs 345,00 crore (Rs 3,450 billion).

Stock market players, however, do not completely rule out the spread of sub-prime crisis and the erosion of profits of top Wall Street financial houses including Merrill Lynch and Citigroup have not hit the Indian markets, but still believe the IPOs may be one of the major reasons for huge FII sell-off.

FIIs sold over Rs 13,000 crore (Rs 130 billion) this month and this include Monday's net sales Rs 3,200 crore (Rs 32 billion).

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