 "Markets enter 'correction' territory; inflation, USD adds to investors woes")
Domestic markets on Wednesday entered correction territory, with the benchmark Nifty and the broader market indices — Nifty Midcap 100 and Nifty Smallcap 100 — declining more than 10 per cent from their all-time highs.
Rising domestic inflation and a strengthening US dollar added to market woes, which were already under pressure from earnings disappointments and sustained foreign outflows.
A fall of over 10 per cent from recent peaks is termed a technical correction. This is only the second time Nifty has entered the correction zone since the Covid-19 selloff in March 2020.
This development could test the patience of swathes of new investors, many of whom have yet to experience a sustained market downfall in the market. Previously, the index had come off 15 per cent between April and June 2022. However, past periods of sharp declines — at least in the benchmark indices — have typically been short-lived.
The Nifty 50 ended Wednesday’s session at 23,559, down 324 points, or 1.4 per cent, while the Sensex closed at 77,691, a decline of 984 points, or 1.3 per cent.
Wednesday’s drop marked the largest single-day decline for both indices since October 3. Since the record highs of September 26, the Nifty has declined 10.14 per cent, while the Sensex is down 9.5 per cent.
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The total market capitalisation (mcap) of BSE-listed companies fell by Rs 48 trillion to Rs 430 trillion after peaking at Rs 478 trillion on September 27.
Data released on Tuesday showed consumer inflation hit a 14-month high in October, with annual retail inflation reaching 6.21 per cent, breaching the central bank’s tolerance band for the first time in more than a year. This also dashed hopes of a rate cut by the Reserve Bank of India (RBI). This inflation print aggravated concerns over a consumption slowdown.
At these elevated levels of inflation, it becomes very difficult for the RBI to lower rates, and given that consumption is already weak and household balance sheets seem to be in tatters, the fact that the room FOR rate cuts are restricted is not great news for the economy and the stock market,” said Saurabh Mukherjea, founder and chief investment officer of Marcellus Investment Managers.
The only silver lining, Mukherjea said, is that capital goods companies are having a good results season, which suggests the private capex cycle is underway. “If the private capex is underway with a lag, job creations should come through,” said Mukherjea.
Many companies, including those in Nifty 50, that have reported earnings so far have either missed analysts’ expectations or matched them, stoking fears of a broader economic slowdown. Several companies have flagged weak demand and sluggish urban consumption.
Foreign portfolio investor (FPI) selling, amid a rising US dollar, has raised concerns over further downside in the market. FPIs have sold shares worth Rs 1.1 trillion since September 26. This selloff has been partly mitigated by Rs 1.4 trillion of buying from domestic institutional investors (DIIs), of which Rs 1.1 trillion has come from domestic mutual funds (MFs).
The election of Donald Trump and the subsequent rise in the dollar index have led to concerns that more foreign flows could move out of emerging markets like India. Trump’s policies, which are expected to drive up inflation in the US, have led to traders pricing in fewer interest rate cuts by the Federal Reserve next year. The dollar index on Wednesday was trading at 106.05, the highest level since April 30.
“There is only one market that’s gaining right now, which is the US. We all have to wait to understand the new administration’s policy,” said Andrew Holland, CEO of Avendus Capital Public Markets Alternate Strategies.
The market breadth was weak, with 3,384 stocks declining and 599 advancing on Wednesday.
Heavyweights HDFC Bank, which fell 2.2 per cent, and Reliance Industries, down 1.6 per cent, were the biggest drag on Sensex.