Markets, rupee in free fall

Sensex falls for 7th day; rupee drops to 6-month low; FII selling streak continues; India out of $2-trillion club

The deteriorating economic outlook continued to weigh on investor sentiment on Wednesday, with the equity markets falling for the seventh straight session and the rupee plunging to a six-month low against the dollar, as foreign funds continued to pull out money.

The benchmark Nifty fell 1.4 per cent on, taking its seven-day fall to 4.1 per cent.

The rupee’s five-day fall stretched to 2.4 per cent and it closed at 65.71 against the greenback, a level last seen on March 15. Across-the-board selling was seen in the equity market, with four stocks declining for every one advancing on the BSE.

Most Asian and emerging market stocks and currencies gained, indicating India’s fall was more on account of domestic factors, mainly on concerns over economic growth, the fiscal deficit, and corporate earnings.

Reports of the Indian armed forces conducting surgical strikes in Nagaland along India-Myanmar border also added to investor woes.

The BSE MidCap Index fell 2 per cent and the BSE 500 Index declined 1.6 per cent. Both indices are down over 5 per cent in the last seven sessions. 

There was some panic on account of economic growth, said Ridham Desai, managing director, Morgan Stanley India. “Most damage is happening on mid-caps, there was a lot of froth there. If you take a three-month view, mid-caps will continue to underperform large-caps,” he said.

The trigger for the latest correction was reports that the government was considering a fiscal stimulus to boost growth. Investors read the move as an acknowledgement of economic slowdown and feared it would widen the fiscal deficit, which would hurt the rupee and dash hopes of further interest rate cuts by the Reserve Bank of India.

“The panic seems misplaced. We think the economy has hit a trough and it is reviving. It will reflect in the next couple of quarters,” said Desai. Market players said the deteriorating macro situation, particularly the depreciating rupee, was hurting overseas investors, who are continuously pulling out of the domestic market.

On Wednesday, foreign institutional investors (FIIs) sold shares worth more than Rs 850 crore, while their domestic counterparts’ buy was worth Rs 1,860 crore. In the past seven sessions, they offloaded shares worth Rs 5,000 crore. Domestic mutual funds (MFs) have provided counterbalance to the selling by purchasing shares worth around Rs 4,500 crore. Since August, FIIs have taken off $3 billion from domestic equities, while MFs have bought stocks worth $5 billion.

“Domestic institutions continue to offer comfort to the Indian markets. There is no need for investors to panic even on the economic growth front as exports are showing signs of revival and the negative impact demonetisation and the GST have had is fading out,” said UR Bhat, managing director, Dalton Capital Advisors.

India worst performer

In the past one week, India has corrected 6 per cent in dollar terms. Asian peers such as South Korea, Indonesia, and China have declined less than 3 per cent during the same period. Meanwhile, Europe and the US are marginally down.

Analysts say a lot of global funds, which had overweight positions on India, are trimming their exposure as sentiment has turned negative amid lofty valuations. The Nifty trades at a one-year forward price-to-earnings multiple of 20 times compared to the long-term average of 16 times. The MSCI Asia Pacific Index trades at relatively attractive valuations of 14.3 times. The sharp one-week fall has also seen India’s market capitalisation (m-cap) slip below the coveted $2 trillion-mark. India’s had joined the $2-trillion m-cap club a few months ago.

Worst-hit stocks and sectors

In the past seven trading sessions, all sectoral indices of the BSE have ended with losses. Among the worst losers are domestic economy-focused sectors like the realty, state-owned banks, and construction indices. Worst-performing Nifty stocks include cement and construction names ACC, UltraTech, and L&T. They have lost between 9 per cent and 13 per cent since September 18.