Rally comes to a screeching halt; Sensex dives 2%, Nifty ends below 11,400

The rally in indices came to an abrupt halt on Monday, with a combination of factors giving the Street a rude shock. The new margin framework for retail investors, skirmishes in the Indo-Chinese border, and anticipated weak GDP numbers together took the indices downhill.

The Sensex closed at 38,628.3, a drop of 839 points or 2.13 per cent —the most since May 18. The Nifty fell 260 points or 2.23 per cent, to end at 11,387.5. On Friday, the indices had touched their highest level since February 27, following six straight sessions of gains.

Further, the Nifty Midcap 100 and Nifty Smallcap 100 fell a sharper 4 per cent and 4.8 per cent, respectively. Until Friday, the Nifty Smallcap had jumped 15 per cent for the month, on course for its highest monthly gain in six years.

Experts said that after such a sharp rally, the market needed a trigger to give up some gains, and it got more than one.

The Securities and Exchange Board of India’s (Sebi) new margin pledging norms, aimed at curbing misuse by brokers, was seen as a major factor for the sharp sell-off, given that it required some brokers to unwind their existing positions. The cash market turnover on the NSE stood at its highest-ever Rs 99,316 crore.

 

 

Besides the new margin norms, “provocative” action by Chinese troops near the border in Eastern Ladakh also weighed on sentiment. The reports of new skirmishes come two-and-a-half months after 20 Indian soldiers were killed in a clash at Galwan Valley.

“The skirmishes are bad news for markets at a time when the economy is anyway not in great shape. While it looked like there was some stability returning with respect to the border dispute, yesterday’s incident shows China might have other designs. Markets rise on good news, but except other markets also doing well, there is nothing good going for Indian markets,” said U R Bhat, director at Dalton Capital India.

Experts said the anticipated weak GDP numbers drove investors to lighten their positions. Official data released after market hours showed that the Indian economy had contracted at its steepest-ever pace of 23.9 per cent year-on-year in the June quarter.

Economists had predicted the GDP to contract by 18.3 per cent. India has been reeling from the impact of Covid-19, with the total infected topping 3.5 million on Sunday, leaving millions jobless and businesses bankrupt.

Even before the pandemic, the economy was on a sticky wicket due to the crisis in the NBFC sector, which had taken a toll on consumption.

“The change in margin system and re-pledging of securities could bring disruptions in volumes of daily trading, as there is insufficient preparation and validation by participants in this system. The securities currently pledged with brokers need to undergo the new process, which, so far, is not smooth going by the runs conducted so far. Hence, large traders are unsure as to whether they will have limits to trade on September 1, which may lead to a drop in volumes,” said Deepak Jasani, head (retail research), HDFC Securities.

Despite Monday’s sell-off, the Sensex and Nifty closed August with a near-3 per cent gain. In the previous two months, they had jumped 16 per cent. The Midcap 100 and Smallcap 100 closed the month with a gain of 7.8 per cent and 11.5 per cent, respectively.

“The markets had been on a one-sided trajectory for some time, and a correction was due,” said Abhimanyu Sofat, vice-president (research), IIFL Securities.

On Monday, there were six losing stocks for every one gaining, on the BSE. In addition, nearly 500 stocks hit their lower limits. All Sensex components barring two ended the session with losses.

The India VIX jumped 25 per cent on Monday, indicating more turbulence ahead. In addition, the market slump wiped out Rs 4.6 trillion of investor wealth. However, investors are still richer by Rs 6.4 trillion in the past one month.