Indian and global equities extended the sell-off on Monday, as investors’ risk appetite continued to wane after US bond yields hit a four-year high, raising speculation that the Federal Reserve will raise policy rates more aggressively.
The benchmark Sensex declined 309.6 points, or 0.9 per cent, to 34,757, its lowest close since January 16. The 30-share blue-chip company index has lost 1,150 points since Friday — its steepest two-day sell-off since November 2016, when high-value currency notes were banned.
In intra-day trade, the Sensex was down as much as 545 points but managed to recoup some losses on buying support by domestic investors.
The Nifty 50 index lost 94 points, or 0.9 per cent, to close at 10,667 — its lowest level since January 11. Most Asian and European markets, too, fell more than a per cent following Friday’s steep fall in the US markets.
The latest volatility is attributed to rising bond yields in the developed markets, which is prompting investors to rebalance their asset allocations. Experts say high yields are making risky stock investments look less attractive and also leading to concerns of earnings erosion due to higher borrowing costs.
“The market has been underestimating how instrumental easy money has been in reflating risk assets. Corporate houses and governments have gone on a debt binge as credit was easily available and at low cost. Both factors are likely to reverse. This reduction of liquidity will hurt emerging markets more than developed markets, as they have indirectly been among the biggest beneficiaries of easy money,” said Rupal Bhansali, chief investment officer, global equities, Ariel Investments.
The yield on the 10-year US Treasury note neared 2.9 per cent on Monday — a level last seen in January 2014. The yield has increased 50 basis points since the start of the year.
On Monday, foreign institutional investors, sold shares worth Rs 12.6 billion, while domestic investors provided buying support to the tune of Rs 11.6 billion.
The India VIX index rose 5.3 per cent to 16, indicating more volatility in the week ahead.
Besides the global downturn, domestic factors such as the widening of the fiscal deficit and the new tax on equities are also weighing on investor sentiment.
The Centre has set a fiscal deficit target of 3.3 per cent for FY19, higher than the market expectation of 3.2 per cent.
The yield on the domestic 10-year government security rose to 7.6 per cent compared to the previous close of 7.56 per cent. Yields have risen by 17 basis points from the pre-Budget close.
Investors fear a spike in bond yields amid widening of fiscal deficit targets could put pressure on the Reserve Bank of India to turn more hawkish. The central bank is set to announce its rate decision on February 7.
Among the biggest losers on Monday were financial stocks. HDFC fell 4 per cent, most among Sensex companies. IndusInd Bank and Kotak Mahindra Bank fell over 2 per cent each, while HDFC Bank, ICICI Bank and Yes Bank fell over a per cent each.
The market breadth, though negative, was relatively better than Friday. On Monday, 1,027 stocks advanced, while 1,753 declined. In comparison, eight stocks declined for every one advance on Friday.
The Indian markets have come off sharply from their peak. The Sensex is down 1,526 points, or 4.2 per cent from its all-time high of 36,283 touched on January 29. The broader market has seen an even steeper fall with BSE 500 index declining 5.3 per cent from its peak touched on December 18.