Markets extend losses on political worries

Mid-caps lead downsides, while institutional investors sell

Stocks fell for the fourth straight day on Wednesday as foreign and domestic institutional investors sold amid worries the government may refrain from implementing unpopular decisions after a key ally pulled out of the ruling coalition.

Mid- and small-cap shares led the decline in the markets with investors pulling money out of riskier stocks on concerns the sell-off will continue for a while.

Benchmark indices dropped less than a per cent on Wednesday with the Sensex falling below 19,000 for the first time in two weeks. BSE’s Sensex fell 123.91 points or 0.65% to close at 18,884.19. NSE’s Nifty declined 51.55 points or 0.90% to end at 5,694.40.

Shares of banks were among the top losers on Wednesday after the Reserve Bank of India’s cautious monetary policy outlook on Tuesday poured cold water on earlier hopes that there could be aggressive rate cuts over the year. Investors were pinning hopes on banks’ bond portfolios churning profits if the central bank cut rates at a faster pace.

Foreign institutional investors (FIIs) net sold shares worth Rs 236.72 crore on Wednesday, while their domestic peers offloaded to the tune of Rs356.93 crore. On Tuesday, FIIs, which have pumped over Rs50,000 crore into Indian equities so far in 2013, had purchased worth Rs 147 crore, a modest amount compared to the recently daily purchases.

Brokers said now investors are worried whether the government would hold back from raising diesel prices to improve its deteriorating finances, failing which global rating agencies could downgrade India to junk.

The political situation will continue to determine the direction of the markets in the near-term, said Sandip Sabharwal, head-portfolio management services of broking firm Prabhudas Lilladher.

Investors were disappointed after the government held back from raising diesel prices this month amid the ongoing Parliament session.  All eyes are on the government on whether it would increase prices once Parliament goes into recess on March 22.

“The political jolt is a timely reminder that the government’s ability to undertake difficult steps could be compromised,” said Rajeev Malik, economist of CLSA. “It could stay away from politically sensitive decisions, such as adjustment in local fuel prices, which are needed for fiscal sanity,” he said in a client note.

BSE’s Mid-cap fell 1.9% while small-cap index dropped 2.3% on Wednesday. Losers outnumbered gainers on the BSE in the ratio 2126:761, indicating a deeper bearish undertone.

“Investors perceive that mid-cap and small-cap shares are highly risky at this juncture. Also, domestic investors who want to invest in government OFSs (offer for sales)are moving out of these segments,” said Tirthankar Patnaik, director and strategist, Religare Capital Markets.