Concerns of economic slowdown continued to weigh on Indian equities, as the benchmark indices closed in losses for a fifth session in a row on Monday. While the benchmark Sensex
lost 295 points or 0.93 per cent to close at 31,626, the National Stock Exchange’s Nifty
closed at 9,872, 92 points or 0.92 per cent lower. This takes the total fall in the past five sessions to 2.4 per cent.
The current phase of market correction has been triggered by weak cues both on the domestic and global fronts. The Street fears that a possible stimulus plan by the government could disturb the fiscal situation. Further, it could also lead to a significant divergence from the fiscal deficit target for the financial year. In the current scenario, a full-fledged stimulus might not be feasible for the government and, hence, it could lead to increased spending in select pockets.
Market experts expect the volatility in the markets
to continue for the near to medium term. Numerous analysts have been predicting a timely correction in the markets
since August, as the gush of liquidity has led to a sharp rise in valuations. This happened even as corporate earnings remained largely stagnant.
The fall was sharper in the broader markets
with the BSE SmallCap index
losing more than two per cent during the session, and the BSE MidCap fell 1.14 per cent. The overall breadth of the market also remained negative with shares of 2,020 BSE-listed companies posting declines against 541 posting advances.
According to G Chokkalingam, founder and MD, Equinomics Research and Advisory, valuations look expensive in several pockets of the market, especially in the mid- and small-cap stocks.
“Industrial growth has stagnated over the years and so have corporate earnings. However, mid and small-cap stocks have rallied even in such a backdrop. Hence, a correction in these segments looks imminent,” he added.
Kotak Institutional Equities Managing Director Sanjeev Prasad said, “The government’s fiscal position will not allow for a large ‘bazooka’ stimulus. Hence, the government may want to focus on specific measures to revive growth in the Indian economy rather than the usual approach of higher expenditure on rural economy and infrastructure.” He added that the financial and taxation benefits in vital areas such as informal economy and residential real estate may revive economic activity and sentiment given their multiplier effect on the Indian economy. During Monday’s session, pharma and realty stocks were the biggest losers with their sectoral indices on the BSE falling 1.8 per cent and 3.5 per cent, respectively. Within the Sensex, Adani Ports was the biggest loser with its shares declining 3.3 per cent. Index heavyweights such as ITC, HDFC Bank and Housing Development Finance Corporation led the fall.
Foreign portfolio investors sold equities worth Rs 1,249 crore, while domestic institutions bought shares worth Rs 1,010 crore. “Relapsing of India’s twin deficit scenario amid slow growth and revival in inflationary pressure, coupled with tapering global liquidity will likely trigger depreciation in the overvalued rupee,” said Dhananjay Sinha, head of research and strategist at Emkay Global Financial Services. A weakening rupee is bad for overseas investor sentiment. On the global front, North Korea’s threat to conduct another hydrogen bomb test is casting a shadow on the market. Ever since the US-North Korea tensions escalated in August, global funds have reduced their risk appetite and have started to chase save havens like US bonds. The 10-year yield of US treasury bonds has shot up by 23 basis-points (bps) during September so far.
On the other hand, all the emerging markets, including India, have seen a sharp sell-off by foreign institutions. While foreign funds have sold more than $4 billion worth equities across various emerging markets
(EMs), India alone saw net sales to the tune of $924 million during the month. However, analysts believe that the EM rally still has some steam left. According to Manishi Raychaudhuri, head of Asia-Pacific equity research, BNP Paribas Securities, the EM rally is expected to continue in the medium term on the back of global economic recovery. “There could be a change in the loose monetary stance adopted by global central banks — we think this constitutes possibly the only risk to EM equities presently,” he said in a report. “Possible turnaround in dollar’s value, led by US Fed balance sheet and policy rate normalisation portend renewed weakening in EM currencies and tapering of enthusiasm in both credit and equity markets,” Sinha added.