Sensex, Nifty see biggest weekly drop since June

Benchmark indices fall 3.5% on China worries, though recovering a bit on favourable US news

Indian equities posted their biggest weekly drop in nearly three months as worries over China’s economy spread panic across global financial markets. The benchmark Sensex on the BSE ended 974 points or 3.6 per cent lower, extending last week’s 700-point fall.

The 30-share index dropped as much as 1,650 points in the week. However, improvement in risk appetite helped the markets recoup some losses over the past two days.

The Sensex on Friday rose 161 points, or 0.6 per cent to close at 26,392.38. The National Stock Exchange's Nifty managed to end the week above the psychological 8,000-level.  Most global markets rallied about one per cent on upbeat US economic growth data. The revised US gross domestic product data showed the world’s biggest economy expanded faster than expected in the second quarter. This was a sentiment booster got investors, hurt by the prospects of slowdown in China.

Sanjeev Prasad, senior executive director & co-head, Kotak Institutional Equities, says the slowing in the global economy, led by China's, was responsible for this week’s fall. And, an indication that the US Federal Reserve would not raise interest rates in September helped the market bounce back.

Experts said the direction next week would hinge on the performance of global markets, especially China, where the government has been trying hard to support the market. A Bloomberg report said China’s policymakers want to stabilise shares before President Xi Jingping appears at a military parade next week to celebrate the 70th anniversary of the World War II victory over Japan. China’s stock market is down nearly 40 per cent from the peak in June.

Some experts fear that pressure on the market would continue, as China’s troubles are unlikely to end soon. “There is a high risk of the Sensex dropping to as low as 22,000, as the odds appear to be in favour of a continued yuan devaluation. The combination of an enfeebled banking system, a sliding real estate sector and a prime minister determined to reset the way the Indian economy works makes India a risky investment destination,” said Saurabh Mukherjea, chief executive-institutional equities, Ambit Capital, in a report titled ‘Exit the fantasy, enter the reality’.

The Sensex on Wednesday closed at a one-year low of 25,715 amid sharp selling by foreign investors. The latter sold shares worth Rs 13,000 crore during the week.

Bank of America Merrill Lynch said major events that would impact the market in the near term would be the US Federal Reserve meeting on September 17, turnaround in corporate earnings and results of the Bihar elections.

The broader markets underperformed the benchmark indices last week, with the BSE small-cap and mid-cap indices down nearly five per cent each.