Sensex, Nifty skid 1.9%; worst fall in 6 months

Mumbai: India's benchmark indices fell the most in six months on Thursday as investor sentiment was dashed by the Reserve Bank of India's move to mop up liquidity.

The Sensex slumped 1,158.63 points, or 1.9%, to close at 59,984.70 and the Nifty fell 353.70 points, or 1.94%, to close at 17,857.25. The decline was the most in a day since April 30. Banks led the selloff with BSE's Bankex dropping almost 3.4%. The Volatility Index or VIX jumped 6.4%, suggesting traders see higher risks to the market in the near term.

The RBI on Wednesday announced a 28-day variable rate reverse repo auction for ₹50,000 crore on November 2. The move is seen as a step towards normalisation of liquidity.


"Markets are worried that this normalisation could happen earlier," said Sanjeev Prasad, co-head, Kotak Institutional Equities. "Valuations are stretched and over the last month or so we have seen a big increase in stock prices, particularly mid and smallcaps. Several of them have gone up without any major change in their fundamentals."

Mid, Smallcap Indices Fare Better
Mid and smallcaps also bore the brunt of the selling, but fared better than the benchmark indices. The BSE MidCap and BSE SmallCap indices fell 1.4% and 1.6%, respectively.

"One thing is becoming clear that inflation is looking more and more entrenched compared to earlier expectations about inflation being transitory," Prasad said. "This could lead to the RBI focusing on inflation as well at some point in time. Anyway, growth is looking reasonably strong and RBI may look at normalising rates as well."

Foreign portfolio investors (FPIs) sold shares worth Rs 3,818.5 crore on Thursday while domestic institutional investors (DIIs) bought equities to the tune of Rs 836.6 crore.

Morgan Stanley's downgrade of Indian equities to equal weight also dampened the market mood. It expects a structural multi-year earnings recovery but valuations are increasingly constraining returns over the next three to six months, Morgan Stanley said.

There is rising worry about valuations as benchmark indices have more than doubled from their March 2020 lows without any sustained correction. The Sensex has slipped 3.6% from the record high of 62,245.43 and the Nifty is off 4.1% from the record high of 18,604.45 - both set on October 19.

Other foreign brokerages too have turned cautious on India amid concern over pricey valuations.

Japan-headquartered Nomura on Monday downgraded Indian equities to neutral from overweight, citing unfavourable risk to reward ratio. UBS recently maintained its overweight stance but said that valuations were expensive relative to Asean countries.

Christopher Wood, global head of equity strategy at Jefferies, said last week that his overweight stance on India looks vulnerable in the near term but he would use any near-term weakness to add to its structural overweight position.

Among the biggest declines of the day, ITC dropped more than 5% on concerns over tobacco taxation even as brokerages raised the target price after the September quarter result. Shares of ICICI Bank, Kotak Mahindra Bank and Axis Bank were the next biggest laggards on the Sensex, down over 3-4%.

Technical charts show the short-term trend is weak.

"Nifty closed below the 20-day simple moving average which is broadly negative for the market. The short-term trend is weak as the market is in a temporary oversold situation but a quick pullback rally cannot be ruled out," said Shrikant Chouhan, head of equity research, retail, Kotak Securities. "18,000 and 18,050 would be the key hurdle for traders and below the same, the correction wave is likely to continue till 17,750-17,700 levels."