Fiscal deficit concerns spook markets; Sensex drops most in two months

Foreign portfolio investors pull out Rs 1,500 crore

The benchmark Sensex on Thursday fell the most in over two months, while the yield on the 10-year government security neared a one-year high after the fiscal deficit at the end of October climbed to 96 per cent of the budgeted target for the current financial year. The extension of production cuts by oil-producing countries triggered fears of further widening in the fiscal deficit.

Domestic markets were already trading weak amid a huge sell-off in technology stocks across the US and Asia, but the selling intensified after the fiscal deficit data was released. Investors also remained cautious ahead of the economic growth data amid the expiry of November series derivative contracts. The gross domestic product numbers, which were released after the market hours, could put the markets under further pressure in the next few sessions, experts said.

The Sensex lost 453 points, or 1.3 per cent, to close at 33,150, and the Nifty closed at 10,226, down 134 points or 1.3 per cent. Both the indices posted their biggest single-day fall since September 27. 

The 10-year g-sec ended at 7.06 per cent compared to the previous day’s close of 7.03 per cent. The rupee fell 0.22 per cent to close at Rs 64.46 against the US dollar. Most Asian markets, too, ended more than one per cent down. Foreign portfolio investors (FPIs) net sold shares worth Rs 1,500 crore on Thursday, while domestic institutions net purchased shares worth Rs 1,202 crore. 

“Indian economy seems to be under pressure. There would be further selling from overseas funds as they realign their strategies after the latest data. However, from a long-term standpoint, the economy should do well,” said Tirthankar Patnaik, chief strategist, Mizuho Bank. Banking and energy stocks led the decline on Thursday. 

Shares of Kotak Mahindra Bank, SBI, ICICI Bank, and Axis bank fell more than 2.3 per cent each and were among the biggest losers in the benchmark Sensex. Reliance Industries, whose shares dropped 2.4 per cent, alone dragged the Sensex lower by 80 points. 

“The (economic) data doesn’t seem to support India’s expensive valuations. Most sectors seem to be undergoing some stress. However, if the strong buying by mutual funds continues, the damage can be contained,” said G Chokkalingam, founder, Equinomics Research & Advisory.

The nervousness in the market was also visible in the rollover data. Nifty rollovers were the lowest in two months at 61 per cent, while Bank Nifty rollovers fell to 54.5 per cent, the lowest in more than two years. The trading volume in the cash and derivatives segments was Rs 49,598 crore and Rs 15 lakh crore, respectively.

The broader markets outperformed the benchmarks as the BSE Mid-cap index closed 0.5 per cent lower, while the BSE Small-cap was up 0.1 per cent.

Market players are pinning hopes on earnings recovery from the December quarter to support expensive valuations. Corporate earnings growth has remained weak due to disruptions such as demonetisation and the goods and services tax roll-out.

The MSCI India index currently trades at 18.1 times its 12-month forward earnings estimate, one standard deviation above its long-term average of about 16 times.