Another day, another fall in the stock market has been a routine over the past few months, notwithstanding the current technical pullback or the earlier small tiebacks. The war in Ukraine is not the sole reason behind such a sustained fall from the highs of October last year. It could have been a trigger but a whole host of factors are pulling the market down – record inflation, interest rate hikes, the falling rupee against the dollar, and high crude oil prices. As the Indian equity market takes cues from the developed markets, particularly the US, overnight news of a crash and slide for the Dow and Nasdaq brings fears every morning of another stock market rout. So, it is not unusual when the Nifty50 is down 200 to 300 points either intraday or on a closing basis.
While the year 2022 began badly for the stock market and became worse after the invasion of Ukraine in February, the market has been on a decline curve since October last year. Since the RBI announced its unscheduled rate hike on May 4, benchmark indices have fallen nearly 5 per cent. This is in stark contrast to the situation in the market for almost one and half years from mid-2020 to October 2021. Between March 2020, when the Nifty hit the multi-year low of 7,511, and October 2021, when the index touched an all-time high of 18,604, the stock benchmark had risen nearly 148 per cent. This was largely because of low-interest rates across the globe, the flow of foreign money into Indian equities, and massive participation by domestic retail investors on account of low returns from other asset classes.
Since then, the market has not crossed the 18,600-mark on Nifty. Instead, it has been extremely volatile with a downward bias. As the trend in global stock markets has turned distinctly bearish, the bullish sentiment has completely disappeared. If bears are in full control over the market, some are even talking about a full-fledged bear market. Why has this happened? To understand why the market has turned completely bearish, let’s first understand why it went up to unsustainable valuations after the fall in the first half of 2020. When Covid-19 hit the globe, every government in the world, particularly the developed world, spent heavily to stimulate their economies hit by the lockdowns.
As central banks flooded the world with easy money and kept the interest rates extremely low, a lot of money found its way into the equity markets across the world, including India. As a result, the market went one way up and kept on making new highs. But things started changing late last year when governments started winding up their covid economic support programmes and the US Federal Reserve indicated its tapering decision. Consequently, interest rates started rising around the world and the yield on the 10-year US government bond started moving up. Higher US yields and interest rate hikes tend to make investments in equities in emerging markets like India less attractive, leading to an outflow of funds.
Much before the retail participation in the equity market started increasing in India, foreign institutional investors (FII) have been big investors in the Indian equity market. In fact, much of the credit goes to FIIs for taking the Indian stock market to new highs in the last two decades. Despite the rise of retail investors and mutual funds, FIIs are not only the big boys in the Indian stock market, they are still a force to reckon with. So, when they start selling on a sustained basis, not only the market falls but the tide turns completely in favour of bears.
Foreign investors have net sold Indian stocks worth 2.5 lakh crores, or $32 billion, since October last year. This is one of the largest-selling sprees by FIIs ever seen in the Indian stock market, according to NSDL data. To put things in perspective, NSDL data shows that foreign investors net invested Rs 2.2 lakh crores between 2014 and 2020. But the recent selling binge has more than halved the Rs 4.4 lakh crores that foreign investors pumped into the domestic secondary market between 2010 and 2020. The intense and unceasing selling by FIIs was triggered by rising global interest rates, multi-decade high inflation in developed economies, a geo-political crisis in Eastern Europe, and rich valuations of Indian stocks.
India is not alone in seeing such high net outflows from foreign investors, though. According to reports, emerging markets like Taiwan and South Korea have also seen sharp outflows from their equity markets due to policy shocks and a slowdown in their local economy. However, despite the selling pressure from foreign investors, the Nifty has fallen about 15 per cent from its all-time high levels. This is because of the emerging buying power of retail investors and domestic institutional investors, who have helped avoid a collapse in equity prices due to the extent of selling by foreign investors. This is said to be the “shock-absorbing” capacity of domestic retail investors and mutual funds who have invested Rs 2.1 lakh crores and Rs 1.1 lakh crores respectively in 2021 and 2020 so far.
This has not only limited price damage despite record outflows from FIIs, but the strength of domestic buying has also meant that this is the slowest correction the market has seen since October last year. However, institutional brokerage firms believe that the liquidity provided by domestic investors over the last one and half years could also run dry if the market continues to remain in the current state of volatility. This means the market could fall further, as FIIs continue to sell.
Though benchmark indices are yet to enter the bear market territory, which happens after a 20 per cent drop, they may very well do so, as the market is expected to undergo both price and time correction. In such a scenario, the bottom for the Nifty is being seen at around 14,000 to 14,500.
(The writer is an independent Mumbai-based senior journalist. He tweets at @ali_chougule)