Markets fall most in a month; benchmarks dip 0.7% as FIIs turn net-sellers

Benchmark indices declined by 0.7 per cent, most in almost a month, tracking weakness in other global markets amid a sell-off in the developed world bond markets. Global investors' risk appetite took a beating after the yield on the US 10-year treasury note rose to a high of 2.72 per cent, most since April 2014. Experts say rise in interest rates could be spoil the stock market party as it would prompt investors to rethink their allocation. Bond yields and prices move in opposite direction. Higher bond yields make equity markets relatively less attractive.

Bond yields, particularly in the US, are rising on fears of ballooning government debt and expectations of rate hikes by the central bank. The benchmark Sensex fell 0.7 per cent to close at 36,034, the Nifty 50 index declined 0.73 per cent to 11,050. Both the indices fell the most since January 1. Only 748 stocks advanced, while 2,097 declined on the BSE. The MSCI Asia Pacific Index declined more than a per cent.

"Equities are ripe for correction after the big rallies. The valuations of equity assets may risk being compressed further if the bond yields continue to rise," Rakpong Chaisuparakul, an investment strategist at KGI Securities.

Foreign institutional investors (FIIs) turned net-sellers for the first time after 10 days. On Tuesday, FIIs sold shares worth Rs 1.06 billion, domestic investors too were net-sellers worth Rs 2.82 billion. In the previous 10 trading sessions, FIIs had purchased shares worth Rs 116 billion ($1.82 billion). Since January 1, they have pumped close to $2 billion in domestic stocks, helping the benchmark indices surge over six per cent.

Besides weak global cues, investors have turned cautious ahead of the Union Budget following the sharp gains this month.

"With the market having run up so much, the easiest answer is profit booking but there is a budget to worry about and also global weaknesses that are causing this correction," said IV Subramaniam, chief investment officer at Quantum Advisors. "At our long-term fund, we're sitting on cash as valuations are high and there's a price at which we are comfortable."

Experts say the market has turned cautious fearing changes to the tax structure on gains made from stock market investments. There is buzz that the centre might impose tax on long-term capital gains (LTCG) or tweak the holding period to avail the benefit. Currently, no tax is levied on gains made by selling equity assets held for more than a year. A flat 15 per cent tax is levied on gains made by selling equity assets held for less than 12 months. The Union Budget will take place on Thursday. The India VIX index on Tuesday declined 8.2 per cent to 16.4.

Most sectoral indices of the BSE ended with losses on Tuesday. The BSE Oil and Gas index bucked the trend with shares of oil marketing companies (OMCs) gaining sharply buoyed by Indian Oil's encouraging result for the December quarter. Only seven of 30 Sensex components ended with gains. Asian Paints, Kotak Mahindra Bank and Axis Bank fell the most at two per cent each. Coal India and Hero MotoCorp gained the most at more than a per cent.