Markets dip over fears of policy rollback, RBI caution on equity valuations

Benchmark indices shed about 0.6%; RIL, SBI drop by over 2% each

The benchmark indices fell on Tuesday, led by losses on index heavyweights like Reliance Industries, ICICI Bank and HDFC. The Reserve Bank of India's (RBI’s) observations that equity valuations are stretched and worries over roll back of easy monetary policy also weighed on investor minds.

The benchmark Sensex fell 396 points, or 0.65 per cent, to end the session at 60,322. The Nifty, on the other hand, slipped 110 points, or 0.6 per cent, to close at 17,999.

Analysts said investors have turned cautious as inflation is surging globally due to the rise in demand and supply chain bottlenecks. The RBI on Monday warned that equity markets are expensive but maintained its optimism around the recovery in the economy.

The central bank said traditional valuation metrics like price-to-book value ratio, price-to-earnings ratio and market capitalisation to GDP ratio stayed above their historical averages. The yield gap (difference between 10-year G-sec yield and a 12-month forward earnings yield of BSE Sensex) at 2.47 per cent has far outstripped its historical long-term average of 1.65 per cent. RBI further said that while domestic economic indicators are improving, concerns over uneven global growth, elevated commodity prices, supply disruptions and fears of withdrawal of monetary support over inflationary concerns have imparted volatility in portfolio flows.

However, it said that steadily rising promoter holdings in listed firms reflect promoters' confidence about their business prospects and comfort with valuations.

Valuation concerns had already led to some global brokerages turn cautious on Indian equities in the recent weeks.

 "The domestic market started trading between gains and losses before slipping into deep red with heavy selling in banking and pharma stocks. RBI's statement that equity market valuations is stretched added to the pressure. Global markets remained mixed as the Biden-Xi meeting ended with both the parties appealing for more cooperation,' said Vinod Nair, head of research at Geojit Financial Services.

Globally, investors were looking for direction on Tuesday regarding how policymakers will react to inflation they termed transitorily. Some former Fed officials had warned that a more aggressive approach is needed to tame accelerating prices. Investors were also waiting for news on who will be the next head of the US Federal Reserve.

Hong Kong’s Hang Seng rose 1.27 per cent as investors cheered discussion between US president Joe Biden and his Chinese counterpart Xi Jinping. In a virtual meeting, Biden urged Xi not to allow competition between the two economic powers and closely linked trading partners to escalate into a conflict.

The market breadth was mixed, with 1,729 stocks declining and 1,602 advancing on BSE. Two-thirds of Sensex stocks declined. RIL was the worst-performing Sensex stock. It fell 2.6 per cent and made a 193-point negative contribution to the Sensex. SBI fell 2.3 per cent. Barring six, all the sectoral indices fell. Energy stocks fell the most, and their gauge fell 2.12 per cent. Maruti Suzuki gained the most at 7.3 per cent followed by M&M, which rose 3.4 per cent.