What goes up, according to the law of nature, comes down. So, there is nothing unusual about corrections in equity market. But when the market starts falling like ninepins, accompanied by bouts of volatility, it becomes a cause of concern. This is precisely the case with Indian equity market over the last two months. When the market falls by 800 points one day, as it happened on October 11, and rebounds in equal measure the next day (October 12), only to fall once again the following week, it means that there are no easy fixes for the market’s current woes. Since September, the BSE Sensex has tanked 4,000 points and it is unable to sustain even a minor pullback.
Since the market hit a record high on August 28, over 90 per cent of India’s top 100 companies have given negative returns; only eight companies of the top 100 have managed to brave the fall. With over 60 companies in the BSE 100 index having fallen 10 to 40 per cent, most market experts are either advising caution or a shift towards large-cap stocks from medium and small caps stocks. If one looks at the benchmark indices – Sensex and Nifty – the market is down 2 per cent year-to-date. In normal times this could be called a routine consolidation after a stellar run in 2017. But if one looks at the broader market, the scene is completely different.
Many times, the indices hide more than they reveal. The benchmark indices still look overweight. But the real pain is in the medium and small caps universe, which represents the broader cosmos of stocks. In seven weeks, the large cap index has fallen around 14 per cent from its all time high. In comparison, the mid-cap and small-cap indices, which made their top nine months ago, are down 28 per cent and 41 per cent, respectively. A fall greater than 20 per cent is said to qualify for a bear market. But market players and equity experts are loathe admitting that after a great run over the last four years, the Indian market may be about to enter the bear phase. So, what does the future hold for markets?
It appears that the Bull Run may be over; the market doesn’t seem to have strong legs to climb higher levels. The ‘Modi rally’ that began in late 2013 came to an end at least six months ago. The subsequent new highs that the market made were largely on the back of domestic liquidity. If the market remained afloat and euphoria lasted longer than warranted, it was because investors were made to believe that all was well with the macros and the economy under Modi. But no government persists with its reformist agenda in the final years of its term when populist policies are given more importance over sound economics. The budget, which read like a 2019 election manifesto, was a fair indication to market that the government would not risk bold reforms in a pre-election year.
Still the market climbed higher, which it could not sustain for too long. Now the sentiment has turned so negative in the last two months after the mess in shadow banking, spearheaded by IL&FS, blew up that the market is sliding week after week to new lows. Each time hope is rekindled of a bounce back after a couple of days of modest gains, the trend is reversed by adverse news flow, followed by heavy selling. But the signs were visible since August when FIIs turned net sellers. The markets ignored the sings because most of the FII selling got bought by domestic institutional investors (DIIs). While this scenario is still playing out, the market is also gradually violating important support levels.
Whether it is a usual, time-bound correction which was long overdue is difficult to say. The market seems to be buckling under the pressure of weak macros and global headwinds. The rupee has depreciated by 16 per cent this year and crude has risen to a high of around $86 per barrel. Rising bond yields on the back of inflationary pressures, higher crude prices, widening of fiscal deficit and an unfavourable current account deficit are big negatives. While the Indian market is bearing the brunt of continuous selling by foreign institutional and portfolio investors (FPI), it is not the only market bearing the brunt of sustained selling. Other emerging markets like China, Korea and Hong Kong have also fallen anywhere between 18 to 28 per cent.
Something similar had happened in mid-2013 when the US Fed Reserve’s tapering of bond purchases and prospects of interest rates hike had resulted in a currency crisis globally. The consequent steep increase in bond yields led to a significant depreciation of rupee and a sharp decline in benchmark equity indices between August and September 2013. After that a lot of things changed between 2014 and 2017, including the massive crash in crude oil prices and gradual pick up in global growth rate, which led to a smart recovery in emerging markets. Now once again, multiple headwinds are threatening to puncture the optimism of global investors. As a result, money is flowing out of the emerging markets and flowing into the US market where interest rates are rising faster.
Despite the ongoing volatility in India’s financial markets, a section of the analysts believes that the market may not fall beyond a point because continuous selling by foreign institutional investors is being absorbed by DIIs. Domestic inflow into capital markets, after a slowdown in July and August, has picked up in September and October, but the Sensex has cracked nearly 10 per cent during this period. DIIs, including mutual funds and insurer, are reported to have bought shares worth Rs. 97, 953 crores so far in 2018, while FIIs, according to reports, have sold local equities worth $ 4.4 billion. Depreciation of rupee and high crude oil prices are said to be the key factors behind the FII sell-off.
According to a recent Care Ratings report, the FPI flow will continue to be volatile in coming months; it could increase further with US interest rate hikes, tightening global liquidity and escalating trade disputes. So, what lies ahead for the equities? Volatility is unlikely to go away anytime soon. Apart from domestic factors, including the coming state assembly elections, direction of the market will also be determined by whether the intensified FII selling is drawing to a close or there is more to follow.
A L I Chougule is an independent senior journalist.
