Markets dive after Japan holds interest rates

Japan's central bank puts policy rate on hold stoking concerns that flows into equity market might be impacted; Sensex, Nifty fall 1.7%

Indian equity markets fell over one per cent on Thursday, tracking a sell-off in world markets after the Bank of Japan (BOJ) decided against expanding its monetary policy.

The expiry of the April derivatives contract also weighed on sentiment.

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The S&P BSE Sensex closed down 1.7 per cent, or 461 points, at 25,603, while the Nifty50 settled below 7,900 at 7,847, down 1.6 per cent or 132 points. The markets fell most since April 5, thus, erasing all gains made in three weeks. Despite Thursday’s fall, the index is up 11.3 per cent since March 1.

The recent rally in the markets propelled them to attain a high of 2016 before collapsing under the weight of global events in Thursday’s trade.

The Sensex trades at around 16 times its one-year forward earnings expectations. In comparison, the MSCI EM index trades at 12.4 times.

“The valuations of the domestic markets post the recent rally are no longer cheap and the risk reward in the near term prospect does not look very attractive,” says Gautam Chhaochharia, head of India Research at UBS.

Sanjeev Prasad, executive director and co-head of Kotak Institutional Equities, believes after the recent run-up, valuations of the Indian market have reached fair value based on their 2016-17 earnings estimate. “This could result in low potential upside,” said Prasad.

On Thursday, BOJ defied market expectations and kept its monetary policy steady despite softness in global demand and an unprecedented rise in the yen.

Japan’s benchmark index, Nikkei 225, closed down 3.75 per cent while the yen bloated against the greenback. Its peers in Asia, however, ended less than a per cent lower.

The ripples of the decision traveled across the globe when European equities opened deep in the red, dropping over 1.5 per cent in today’s trades. The major European indices were also weighed down by disappointing earnings. US futures, too, pointed to a weak opening.

Overnight, the US Federal Reserve exhibited a dovish stance and maintained status quo on interest rates for the third consecutive meeting since it began tightening monetary policy in December. The central bank also remained tightlipped about an interest rates hike in June, thus, keeping investors cautious across the world.

“BOJ development is negative while the Fed is in line with expectations,” said Chhaochharia.

Foreign investors have invested $1.7 billion into Indian stocks this year. In April, they pumped in around $500 million.

In the commodity markets, gold shone brighter as the dollar fell as much as 3 per cent against the yen. The yellow metal has rallied nearly 17 per cent this year on expectations that the Fed will be gradual about interest rate hikes.

The broader indices fell in line with the benchmarks on Thursday, with the BSE 500 declining 1.5 per cent. Among sectoral indices, BSE metal and oil & gas index fell the most at two per cent, while the banking index fell less than a per cent. The BSE Realty index was the only gainer as realty stocks gained following a proposal to increase the floor space index (FSI) in Mumbai.

Among individual stocks, HDFC, ITC and M&M were the biggest losers, each declining around three per cent. TCS, Axis Bank and Lupin were the only three gainers in the index.