The benchmark Sensex fluctuated between gains and losses for the most part of the day, but it capitulated in the final hour of trade amid a sell-off in the European markets, triggered by worries over a surge in bond yields. The Sensex closed at 60,755, after a decline of 554 points, or 0.9 per cent, while the Nifty50 index fell 195 points, or 1.07 per cent, to end the session at 18,113.
The US 10-year Treasury yield rose to 1.81 per cent, the highest in two years, while the yield on India's 10-year government bond closed at 6.63 per cent on Tuesday. Global yields are rising on the back of the consensus on four Federal Reserve rate hikes this year, and because of worries about the persistence of high inflation.
Market participants are beginning to get concerned about the earlier-than-anticipated trimming of the Fed’s balance sheet. The withdrawal of liquidity is seen as having a negative for risky assets.
Rising global oil prices acted as another headwind for the market. The benchmark oil prices climbed to their highest level since 2014 as possible supply disruption after attacks in the Gulf added to an already tight supply outlook. Brent crude futures rose $1.26, or 1.46 per cent, to $87.74 a barrel by 7.20 pm IST, while US West Texas Intermediate (WTI) crude futures jumped $1.69, or 2.02 per cent, to $85.51 a barrel.
"Bond yields are at a psychologically important mark. Omicron is not under control and inflation is rising, and central banks have no option but to hike rates even if there is a lockdown. Moreover, the prospect of three to four hikes against central banks terming inflation as transitory is a huge sentiment shift,'' said U R Bhat, founder, Alphaniti Fintech.
"Better quarterly results have already come, and there is nothing to cheer on that count either. Yesterday, both foreign as well as domestic institutions were sellers. So some investors are worried about who will give crucial support when foreign investors move money," he said.
"Volatility usually remains high during the corrective phase, and the earnings season is further adding to the choppiness. Keeping in mind the scenario, it's prudent to maintain a few shorts also. The focus should be on earnings and global markets for cues," said Ajit Mishra, research, Religare Broking.
The market breadth was weak, with 2,350 stocks declining and 1,092 advancing. “The advance-decline ratio has fallen sharply suggesting broad-based profit-taking. The Nifty has formed a bearish engulfing pattern. Unless the Nifty crosses the high for January 18, which is 18,351, we could see a sell-on-rises scenario. A breach of 18,056-18,081 could lead to further weakness in the Nifty50," said Deepak Jasani, head of retail research, HDFC Securities.
More than two-thirds of the Sensex stocks declined. Maruti Suzuki fell the most and slipped 4.2 per cent. UltraTech Cement fell 3.8 per cent, Tech Mahindra 3.5 per cent, and HCL Technologies 3.09 per cent.
All the sectoral indices barring one declined. Basic Materials and Realty stocks fell the most -- 2.7 and 2.6 per cent, respectively. The telecom index also fell 2.6 per cent.