The benchmark Sensex on Thursday saw its biggest drop in six months as concerns around inflation, valuations and policy normalisation by the Reserve Bank of India (RBI) triggered risk off bets. Sentiment was further dented with Morgan Stanley becoming the latest foreign brokerage to sound caution on the domestic market.
The benchmark Sensex closed at 59,984, down 1,158 points, or 1.9 per cent—most since April 30. The index slipped below the 60,000 mark after 13 trading sessions. This was also the sixth biggest fall of the year. The Nifty 50 index fell 353 points, or 1.9 per cent, to finish at 17,857. The India Vix index soared 6.5 per cent to 17.9 amid expiry of derivatives contracts.
Most Asian markets fell on Thursday, however, India was the saw the biggest declines. Banking stocks, which have the highest weightage in the benchmark indices, led the fall. The Bank Nifty index dropped 3.34 per cent with ICICI Bank, Kotak Bank and Axis Bank dropping around 4 per cent each.
Market experts said investors were spooked by RBI’s plan to drain cash from the banking system.
The central bank on Wednesday announced its plans to conduct its first 28-day variable rate reverse repo (VRR) auction on November 2, 2021, for Rs 50,000 crore. Analysts termed RBI’s announcement as a measure to remove excess liquidity from the system for a longer period and said it might moderate liquidity led gains in the equity markets. VRR auctions at present are for 14 days.
Record valuations after this year’s stellar run remained another concern. While downgrading India from overweight to equal weight, Morgan Stanley said it sees India’s valuations as “increasingly constraining returns over the next 3-6 months.”
The benchmark Nifty currently trades at record high valuations of 24 times its estimated 12-month forward earnings, compared to historical average of 17 times.
“India has done exceptionally well vis-a-vis its emerging market peers. There is a bit of profit-taking more than anything else. We might see some more selling and volatility as Fed tapering nears. The risk-reward for India is a little skewed towards the risk side,’ said Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies
Sustained selling by foreign portfolio investors (FPIs) and large pubic floats by companies such as Nykaa and Paytm also impacted liquidity, said experts.
On Thursday, FPIs sold shares worth Rs 3,819 crore, while their domestic counterparts provided buying support to the tune of Rs 837 crore. Since October 20, FPIs have pulled out nearly Rs 17,000 crore from the domestic markets.
Globally, Asian equities fell as investors feared a prolonged pandemic and elevated inflation could hurt the economic recovery. Chinese benchmarks fell for the third day as US-China tensions added another layer of volatility. On Thursday, Taiwanese President Tsai Ing-wen confirmed the presence of the US troops in the country even as China warned Taiwan that American support poses huge risks.
Experts said investors are eyeing the US GDP data and the outcome of the Fed meeting scheduled for next week. Analysts warned sentiment could weaken further if investors lose confidence in the ability of policymakers to tame inflation without compromising on growth.
The market breadth was negative, with 2,387 stocks declining and 900 stocks advancing on BSE. All the Sensex components barring six, ended the session with losses. ITC was the worst-performing Sensex stock and declined 5.5 per cent. Realty stocks slumped the most at 3.7 per cent.