With the Union Budget just five days away, domestic stock markets on Wednesday witnessed heavy selling pressure, sending the benchmark Sensex plunging by 938 points to 47,409.93 and the NSE Nifty Index by 271 points to 13,967.50. With this, the Sensex has fallen 2,600 points after it hit the 50,000 mark last week.
What led to the selling pressure?
After a weak start, the benchmark indices gradually drifted lower as the day progressed and settled around the day’s low. Several factors like negative foreign flows, uncertainty about the US stimulus and US FOMC (Federal Open Market Committee) meeting combined with not so encouraging earnings announcements dented the sentiment. Besides, caution ahead of the Union Budget and scheduled derivatives expiry also added to the selling pressure. In line with the benchmark indices, all the other indices, barring FMCG, ended with losses with metal, realty and auto remaining the top losers.
Are foreign investors selling stocks?
Foreign portfolio investors (FPIs) who invested Rs 1.70 lakh crore in calendar year 2020 have turned cautious. It is well-known that a fall in FPIs inflows will be the biggest risk to the liquidity-driven rally. Indian bourses mirrored mixed sentiment from global peers with a downward rally owing to consecutive days of FPI selling. Barring the defensive FMCG segment, all sectors traded in the red zone with banking and pharma stocks being the worst hit. “We should expect higher volatility in the coming days’ given pre-budget event risk,” said Vinod Nair, Head of Research, Geojit Financial Services.
How did other markets perform today?
The global markets were mixed today ahead of the US Fed meeting amid uncertainty over the US stimulus. In the Asian session on Wednesday, shares fell due to some profit-taking, as investors grew wary of stretched valuations. Europe’s share indexes opened lower on Wednesday, while investors focused on the US Federal Reserve meeting and US tech giants’ earnings. Besides, worries over the Covid pandemic and economic recovery have made investors cautious.
What are the issues ahead for the markets?
The markets are eagerly awaiting the Union Budget which is scheduled for February 1. The market is worried about the impact of Covid on fiscal deficit and the borrowing programme. Besides, there are worries over new tax proposals of the government which is seeking new revenue sources. FPIs are expected to take a view after considering the US stimulus programme which is yet to be formalised. Global investors are also awaiting the statement of the US FOMC about the economy and interest rates. A major reason for the global stock rally all these months was a liquidity surge in most countries, including India. “Liquidity has been pushing up the market, not economic fundamentals,” said BSE dealer Pawan Dharnidharka.
The Reserve Bank of India will unveil its bi-monthly monetary policy on February 5. The central bank is expected to give an indication about the policy stance and the way forward on the unwinding of the accommodative policies.
Will the FOMC meeting impact markets?
The US Federal Reserve is expected to be more cautious about the near-term outlook, while more optimistic over the longer-term. “For investors, the main focus will be on the message that the central bank provides. We expect the central bank to reiterate that the need for accommodation remains firmly in place while tapering of asset purchases is not on the policy agenda as yet, even as a new fiscal program is being introduced,” Centrum Research said in a note. The upcoming FOMC policy meeting is most likely to leave the policy rate unchanged at 0-0.25 per cent and FOMC is also expected to reinforce the fact that there is still the need for accommodation as the US economy continues to battle the pandemic.
“We think that the liquidity environment will remain supportive suggesting that a sharp risk aversion is unlikely. Over the last week, many major central banks such as the ECB, BoJ and BoC provided continued assurances that monetary policy will remain accommodative for a considerable period of time as output gaps remain negative,” Centrum said.