The benchmark Nifty ended August with negative returns of 0.9 per cent, taking the three-month market correction (between June and August) to 7.5 per cent.
Selling by FIIs after the announcement of the tax surcharge, combined with global headwinds, triggered a heavy sell-off, causing the broader indices to be the worst-hit. Between June and August, the Nifty Midcap ended 13 per cent lower while the Smallcap was down 18 per cent.
However, on Friday, the Nifty ended 0.7 per cent higher in anticipation of additional policy measures by Finance Minister Nirmala Sitharaman to give fillip to the economy. Market experts have warned that the market is likely to see continued selling pressure, given that measures by Centre have failed to cut ice with institutional investors.
“Nothing has really changed for FIIs. It goes back to pure fundamentals. Probably, they are waiting for the FM to come with a comprehensive package. There is no incentive for FIIs to rush back to the markets as corporate and economic fundamentals are in bad shape,” said Andrew Holland, CEO of Avendus Capital Public Markets Alternate Strategies.
June quarter (Q1) earnings by most firms failed to meet Street expectations, forcing analysts to cut their earnings growth targets for FY20. The macro picture also remains bleak. During Q1, India’s gross domestic product grew at 5 per cent, which was well below the median estimate of 5.7 per cent.
Mounting troubles for NBFCs, concerns over corporate debt, and uncertainty surrounding the US-China trade war have further contributed to the negative sentiment. In a recent note, ICICI Securities analysts said the consensus view has turned pessimistic since the Budget.
“Negative feedback loop from a sharp correction in stock prices is impacting the fundamental view, which has not changed materially over the past one month.” Market players said the Centre should announce more proactive measures to boost investor confidence beginning with more aggressive recapitalisation of PSU banks and steps to increase the liquidity.
“There has to be greater flow of money. Lots of refunds are stuck and the government has to start releasing it. Once that happens, people, the liquidity position will improve,”said Abhimanyu Sofat, head of research at IIFL.
On Friday, Finance Minsiter Nirmala Sitharman outlined Rs 70,000 crore of recapitalisation planned for PSBs in FY20. Market participants said that given the weak credit demand from corporates and the NBFC crisis, the recapitalisation package will not be able to meet the key objective of reviving lending and improving banks' fortunes.