Indices fall for third straight day as FPI selling weighs on market

Sensex, Nifty drop more than 1%; foreign investors sell shares worth Rs 5,143 crore

The benchmark indices fell for the third straight session on Friday due to sustained selling by overseas investors amid concerns over India’s lofty valuations and the impact of spiralling commodity prices.

The Sensex fell 678 points, or 1.13 per cent, to close at 59,307 -- the lowest closing level since October 6. The 30-share index has declined 2,043 points, or 3.33 per cent in the previous three trading sessions. The Nifty 50 index dropped 186 points, or 1.04 per cent, to end at 17,672.

Foreign portfolio investors (FPIs) on Friday sold shares worth Rs 5,143 crore. Since October 20, FPIs have pulled out over Rs 22,000 crore from the domestic equity markets.

The sharp sell-off comes amid a series of downgrades by global brokerages, which highlighted headwinds such as tapering by the US Federal Reserve, possible rate hikes by the Reserve Bank of India (RBI) early next year, and India’s record valuation premiums compared with other emerging markets (EMs).

Market experts said FPIs were re-allocating some of their funds by pulling out of India and investing in markets such as Indonesia and China.

“In the last eight trading sessions we have seen sustained selling by FPIs. Foreign brokerages have downgraded India due to excessive valuations. This might have prompted FPIs to sell on a sustained basis,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services.

Morgan Stanley on Wednesday downgraded Indian equities from ‘overweight’ to ‘equal weight’, and recommended taking some money off the table. It upgraded Indonesia to ‘overweight’.

“At 24 times forward price-to-earnings (P/E), we look for some consolidation ahead of Fed tapering, an RBI hike in February, and higher energy costs,” Morgan Stanley equity strategists led by Daniel Blake and Jonathan Garner said in a note on Asia Pacific markets.

In the recent past, HSBC, UBS, and Nomura have increased weighting of China and other Asian markets, while raising concerns over India's expensive valuations. The benchmark Nifty currently trades at record high valuations of 24 times its estimated 12-month forward earnings, compared with the historical average of 17 times.

Most global markets, too, traded weak on Friday as US bond markets signalled that investors expected central bank policy tightening to lead to slower economic growth and inflation. This was after the US Treasury yield curve inverted between 20 and 30 years.

On Thursday, the Indian markets had posted their worst fall in six months on concerns over the RBI’s plan to drain cash from the banking system. Besides, the margin pressure reported by blue-chip firms in the consumer and auto space also stoked fears of earnings downgrades, said experts.

“Earnings disappointment combined with feeble global cues are weighing on the sentiment. Apart from earnings announcements, participants will be closely eyeing the upcoming US Fed meet and auto sales numbers for cues. Indications are pointing towards further slides, so participants should maintain a cautious approach and prefer a hedged approach,” said Ajit Mishra, VP - research, Religare Broking.

Experts said the ongoing IPO rush was also a key factor weighing on the market performance. Over half a dozen IPOs are looking to cumulatively mop up over Rs 32,000 crore. “Some of these IPOs are expected to get heavily oversubscribed. Therefore, there will be a huge drain of money from the secondary to the primary market,” said Vijayakumar.

The markets saw a roller coaster ride in October. The Sensex rose as much as 5 per cent only to give up almost all the gains and end the month with a 0.3 per cent gain— the worst monthly showing since July. The small-cap indices saw even a higher swing, coming off nearly 9 per cent from their highs.