Sensex sheds 770 points after hitting all-time high

Street cautious ahead of RBI, US Fed meetings next week; rate-sensitive stocks fall

The markets declined sharply this week, led by rate-sensitive stocks in the banking sector, as investors turned cautious ahead of the Reserve Bank of India (RBI)'s policy review and the US Federal Reserve (Fed) meeting next week.

A faster-than-expected rise in consumer price inflation led to concern RBI would raise the policy rate in the coming week. Global shares, too, traded weak on concern the Fed would announce a move to taper its bond-buying programme.

Falling for a fourth consecutive day, the benchmark BSE Sensex ended at 20,715.58 on Friday, down one per cent, or 210.03 points, while the 50-share Nifty ended 1.1 per cent, or 68.65 points, lower at 6,168.40, levels last seen ahead of the Assembly elections in four states.

The Sensex has fallen about 770 points from its all-time intra-day high of 21,483.74 touched on Monday, after the Bharatiya Janata Party (BJP) emerged victorious in four of the five state elections. Both the Sensex and the Nifty surpassed their previous all-time highs on Monday, owing to hopes the BJP would win the general elections next year.

Experts, however, said the euphoria seen after the state polls had died down and investors had turned cautious ahead of crucial events lined up next week.

It is expected RBI Governor Raghuram Rajan will increase the key repo rate 25 basis points to eight per cent at the central bank's mid-quarter monetary policy review on Wednesday, owing to a steep rise in inflation. Data released on Thursday showed in November, Consumer Price Index-based inflation rose 11.24 per cent year-on-year.

"Now, global markets are increasingly expecting the Fed to announce some sort of tapering in its ensuing meeting on December 18. Similarly, the probability of a rate hike by RBI on the same day has also risen sharply after the CPI data," said Dipen Shah, head of research (private client group), Kotak Securities.

Anticipating a rate rise, banking stocks took a beating this week. Besides lenders such as ICICI Bank and State Bank of India, the BHEL, NTPC and Tata Motors stocks also fell this week.

"Concerns of early stimulus tapering in the US and retail inflation data hit the markets and fuelled speculation RBI may raise rates in the coming monetary meeting. The strong dollar kept rupee under pressure and increased concern about slow foreign inflows into the country in the days to come," said Alex Mathews, head (research), Geojit BNP Paribas Financial Services.

On Friday, the rupee ended at 62.13 a dollar, down from 61.41 last Friday. Meanwhile, foreign investors net sold shares worth Rs 432 crore in the cash segment, provisional data showed. This year, foreign investors have pumped in about Rs 1 lakh crore into Indian equities. However, the benchmark indices have gained about just five per cent.

Most brokerages expect the market to gain more than 10 per cent next year, though they don't rule out further correction in the near term due to factors such as Fed tapering, rate rises and weak earnings in the December quarter. "In our view, three factors will likely drive a correction in the markets in early 2014-tapering by the US Fed; supply of paper, with the government needing to raise $6 billion in equity by March 2014 to meet its disinvestment target; and rate rises and sluggish December quarter earnings," Jyotivardhan Jaipuria, head of research, Bank of America-Merrill Lynch, said in an India strategy report.

The brokerage expects the Sensex to correct to 19,000-19,500 levels early 2014. It has set a 2014 year-end index target of 23,500.