The domestic markets ended in the green for the first time in six days on Tuesday as investors rushed to buy beaten-down stocks amid positive global cues. However, the mood remained cautious as the Federal Open Market Committee (FOMC) started its two-day meeting to decide on the next steps for US monetary policy.
The Sensex witnessed a gap-down opening on Tuesday and slumped as much as 1,082 points before staging a strong comeback. A similar wild ride was seen in the US markets on Monday where the Dow Jones had managed to erase an 1,100-point decline to finish in positive territory.
The Sensex ended the session at 57,858, with a gain of 367 points, or 0.64 per cent, while the Nifty rose 129 points, or 0.75 per cent, to close at 17,278.
In the preceding five trading sessions, both indices had slumped over 6 per cent, causing wealth erosion of nearly Rs 20 trillion, as global investors dumped risky assets amid rising bond yields in the US. Foreign portfolio investors (FPIs) have pulled out nearly $3 billion from the domestic markets in the past two weeks.
Analysts termed Tuesday's recovery as a technical rebound with headwinds such as sustained selling by FPIs remaining a worry. On Tuesday, FPIs sold shares worth Rs 7,094 crore, while their domestic counterparts bought shares worth Rs 4,534 crore.
“It is more of short-covering today. Yesterday's fall was a bit steep. People thought the markets would slide further, so they covered their short positions. What we saw today was a technical rebound. We have the Fed's announcement tomorrow; then we have the Budget. So volatility is expected to continue. Ukraine is becoming a hotspot,” said U R Bhat, co-founder of Alphaniti Fintech.
As of Tuesday, the US put 8,500 troops on heightened alert for deployment to aid NATO forces in response to Russia's build-up of troops on the Ukraine border. Crude oil prices rose marginally on Tuesday after declining 1.7 per cent the day before.
Investors are keenly watching the Federal Reserve policy meeting. The US central bank is expected to begin raising rates as soon as March. This has led to a lot of turmoil in equity markets, which have had a phenomenal run since March 2020, thanks to the post-pandemic monetary stimulus.
Analysts said the volatility is likely to continue till there is some clarity on the Fed's plan to tame inflation, and what's in the Union Budget. Some analysts opined that equity markets were caught napping vis-a-vis pricing inflation, and there could be more correction in the offing.
The Indian markets had gained as much as 8 per cent from their December 2021 lows. The latest correction has pushed year-to-date returns in negative territory.
"The markets will react to the Fed meeting outcome in early trade on Thursday, and we expect volatility to remain high, thanks to the scheduled monthly expiry. Keeping in mind the scenario, we reiterate our cautious view and suggest preferring hedged positions,” said Ajit Mishra, VP (research), Religare Broking.
The India Vix index cooled off 6.4 per cent after soaring 21 per cent on Monday. Investors' focus has also shifted to corporate earnings, which many say have been subdued so far.
"The earnings season has gathered pace with revenues largely in line with estimates. However, higher commodity prices are taking a toll on margins and profitability to some extent. In the past, we have observed that market volatility persists until the announcement of the first-rate hike by the Fed, post that it settles down and flow in equities resumes,' said Mitul Shah, head of research at Reliance Securities.
The market breadth was positive, with 1,955 stocks advancing and 1,404 declining. Around 441 stocks were locked in the lower circuit, while 218 hit the upper circuit. Close to two-thirds of the Sensex stocks gained. Axis Bank rose 6.7 per cent and contributed most to the index gains, followed by SBI, which rose 4.2 per cent.