Fed rate hike, high prices take their toll

Several factors have caused the huge volatility and the 1,280-point decline in the Sensex since last Thursday and are set to impact the stock market in the days to come.

First, the global economic climate has changed and global funds have consequently realigned their portfolios, which led to selling in India.

With the US Federal Reserve raising interest rates last Tuesday to 5 per cent, indications of further rate hikes have made global investors change their opinion on emerging markets.

Some hedge funds have been selling substantially across all emerging markets, including commodity markets, in an attempt to exit before the sentiment turns negative. Fears of rise in interest rates in Japan also added to the selling pressure from hedge funds, which operate on yen-denominated borrowings.

Valuations, too, had not been favourable for Indian markets and several foreign institutional investors were already underweight on India vis-a-vis other emerging markets.

"The Indian markets can't escape the change in the global climate, especially as Indian stock valuations are already on the high side relative to other markets," said Samir Arora, managing director, Helios Capital.

The correction in international commodity prices also precipitated a fall in domestic metal stocks, and affected the sentiment.

After falling over 10 per cent on Tuesday, metal stocks made a comeback the next day only to witness another fall on Thursday.

"We see value in metal stocks as the demand continues to be pretty strong and if Mittal's bid for Arcelor became successful, it would mean consolidation in the steel sector and possibly firm steel prices," pointed out Amitabh Chakraborthy, head of research, Brics Securities-PCG.

There are concerns on the political front too and the renewed strength of the Left front in the state elections has been another dampener. The noises about reservation in the private sector and the resistance witnessed to pass the banking Bill on Wednesday have only demonstrated that economic reforms will not be easy to come by going forward.

Unlike in October 2005, when mutual funds provided support to the market when the FIIs were pulling out, domestic funds have refrained from providing strong buying support this time around.

Fund managers are adopting a wait-and-watch policy at a time when foreign funds seem to be exiting. A large part of the huge recent collections have already been deployed in the past few months, with funds making purchases of nearly Rs 7,000 crore in March and April.

Going forward, analysts do not exude much optimism. "After the big bang recovery yesterday, there was a lot of comfort as it was a grand display of continued momentum in the market. But today's fall has made investors completely jittery and one could expect selling on every rise," said Kunj Bansal, chief investment officer, Religare.

"At best, I expect markets to stagnate at current levels. The worst could be anyone's guess," added Manish Kanchan, chief executive officer, Ambit Capital.