The benchmark indices fell 1.6 per cent on Friday, extending their weekly drop to nearly 4 per cent — the most in nearly five months. The latest decline came after US indices posted their worst drop since 2020 on Thursday amid rising US Treasury yields.
An uncertain economic outlook, soaring prices, and a shift towards a tighter monetary regime have triggered a flight to safety among investors.
The benchmark Sensex declined as much as 2 per cent intraday before recovering some of the losses to finish the session at 54,835, with a decline of 866 points, or 1.56 per cent. The Nifty, on the other hand, ended the session at 16,411, a decline of 271 points or 1.6 per cent.
The Nasdaq Composite index, which comprises many of the largest US technology companies, fell 5 per cent on Thursday, its biggest one-day decline since June 2020. The S&P 500 declined 3.5 per cent, and Dow Jones fell 3.1 per cent.
On Wednesday, the US Federal Reserve announced a 50 basis points rate hike, the highest in 22 years, but ruled out a 75-bps hike in the future. This assurance led to a relief rally.
However, sentiment turned sour as investors began assessing the impact of tighter monetary policy, a possible dent in corporate profits, and price rises.
The rising commodity prices resulting from the Russian invasion of Ukraine and the Covid-19 resurgence in China also weighed on investor sentiments. The price of Brent crude rose 8 per cent this week and was trading at $115.4 per barrel. Crude prices rose after the European Union announced its plans to phase out Russian oil imports in six months. Brent Crude posted its first back-to-back weekly gains since early March.
The Bank of England on Thursday warned that the UK economy would slide into recession. The UK central bank raised the main interest rate to 1 per cent, the highest level in 13 years.
The tightening monetary conditions led to a sell-off in the bond markets. The 10 years US bond yield was trading at its highest level since November 2018 at 3.09 per cent. Analysts expressed concerns about whether the central bank's action could tame inflation.
“These are supply-side issues. I don’t think interest rate hikes can deal with supply-side inflation. The central banks cannot be seen doing nothing since inflation has risen. So, they have done their bit. I see the markets in a range-bound trade for the time being. India had a huge FPI selling which the domestic investors more than matched,” said UR Bhat, founder, Alphaniti Fintech.
Corporate results and the geopolitical situation in Europe are likely to influence the market trajectory.
“With all the major events behind us, the focus would return to earnings and upcoming macroeconomic data. We reiterate our bearish bias in Nifty and suggest continuing with the ‘sell on rising’ approach,” said Ajit Mishra, vice-president of research, Religare Broking.
The market breadth was weak, with 2,615 stocks declining against 758 that advanced. About 105 stocks hit their 52-week low, while 56 hit their 52-week highs. Four-fifths of Sensex constituents declined. Bajaj Finance dropped 5 per cent, the most amongst Sensex constituents. Realty stocks declined the most, and its sectoral index fell 3.5 per cent.