Indices post biggest fall in 6 mths as inflation, valuation trigger selloff

India’s benchmark indices on Thursday posted their biggest single-day drop in about six months as concerns over inflation, valuations, and policy normalisation by the Reserve Bank of India (RBI) triggered risk-off bets. Sentiment was further dented by Morgan Stanley’s downgrading of Indian equities, becoming the latest foreign brokerage to sound a note of caution about the domestic market.

The Sensex closed at 59,984, down 1,158 points, or 1.9 per cent — the biggest decline since April 30. The index slipped below the 60,000 mark after 13 trading sessions. This was also its sixth-biggest fall of the year. The Nifty50 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 the expiry of derivatives contracts.

Most Asian markets fell on Thursday, with India witnessing the biggest decline. Banking stocks, which have the highest weighting in the benchmark indices, led the fall. The Bank Nifty index dropped 3.34 per cent, with ICICI Bank, Kotak Bank, and Axis Bank falling around 4 per cent each.

Market experts said investors were spooked by the 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 for Rs 50,000 crore. Analysts termed the announcement 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. At present, VRR auctions are for 14 days.

Record valuations after this year’s stellar run remain another concern. While downgrading India from overweight to equal weight, Morgan Stanley said it saw 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, as against the historical average of 17 times.

“India has done exceptionally well vis-à-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 public 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.

Asian stocks fell as investors feared a prolonged pandemic and elevated inflation could hurt the economic recovery. The Chinese benchmarks fell for a third day as US-China tensions added another layer of volatility. On Thursday, Taiwanese President Tsai Ing-wen confirmed the presence of US troops in the country even as China warned Taiwan that American support posed huge risks.

Experts said investors were eyeing the US GDP data and the outcome of the Fed meeting, scheduled for next week. Analysts warned that sentiment could weaken further if investors lost 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 the BSE. All but six Sensex components 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.