Sensex, Nifty: 5 reasons behind market selloff that eroded Rs 4 lakh crore worth investor wealth

Benchmark indices Sensex and Nifty on Thursday continued their losing streak for the third straight day, thanks to concerns over a hawkish Fed commentary, boiling crude oil prices, a reversal in foreign equity flows and a weak rupee that is hovering near record low levels. Add to that is record high levels for domestic benchmark indices, high US treasury yields and unsupportive global markets, which leave little scope for error.

Including Thursday's 580-odd points fall, the BSE Senex has fallen just over 1,600 points in three sessions, with NSE barometer Nifty slipping below 19,800 level from near 20,200 level on September 15. Stock investors lost Rs 4 lakh crore in the process. Here are the five factors weighing on the market: 

Fed commentary

As Emkay Global's lead economist Madhavi Arora pointed out: the US Fed delivered a more 'hawkish hold' than what markets had expected. In particular, the Summary of Economic Projections (SEP) skewed hawkish with both the 2024 and 2025 median dots revised 50 basis points higher, Arora said, reinforcing view that central banks in developed economies are increasingly guiding to holding rates higher for longer.

"Thus, the FOMC went beyond just leaning into the soft-landing narrative—now forecasting only a trivial weakening in growth and labour markets next year and beyond to justify less easing. The updated dot plot continues to project one more hike this year — although it is worth noting that the Committee is more closely split than in June, with seven of the 19 participants now anticipating staying on hold through year-end," Arora said.

Crude oil prices

Brent oil is now hovering at around $90 a barrel level, up 30 per cent since June. A few projections suggest it may hit $100 a barrel mark in winters. If it does, that could hurt inflation and central bank rate cuts would be illusive.   

"India depends on imports for more than 85 per cent of its domestic oil needs, so higher oil prices are a negative. However, unlike past episodes of high oil prices, we do not expect a pass-through to domestic retail prices, due to upcoming state and general elections, high food prices and weak rural demand. This means a limited inflationary impact, but a bigger spillover on the twin deficits. Higher oil prices will also raise the import bill, and along with restrictions on rice exports, it is likely to widen the current account deficit sequentially, from a deficit of 0.2 per cent of GDP in Q1 to 1.1 per cent in Q2 and to 1.9 per cent of GDP in H2 2023," Nomura's Sonal Varma said. 

Foreign outflows, weak rupee

After months of buying, foreign portfolio investors (FPIs) are dumping domestic equities. They have sold Rs 5,213 crore worth of domestic stocks so far this month. The FPI flows were falling on a monthly basis since June's Rs 47,148 crore inflows. Inflows in July stood at Rs 46,618 crore and in August at Rs 12,262 crore. Analysts believe FPI activity may remain volatile, and any further spike in oil prices and US bond yields could weigh on rupee and trigger more outflows from emerging markets, including India.

Global weakness

Stock markets in Japan, China, Hong Kong, Korea and Taiwan were trading in the red on Thursday. Like India, most of these markets are down for the third straight session. 

"Higher interest rates are the new normal — is the signal which Fed has sent to markets this time. Unlike last meet, FOMC expects the rates to be 0.25 per cent higher than current levels at the end of the year, which appears to be unlikely. Global bond market actions does not seem to be cheerful for equity markets and, hence, one has to be cautiously optimistic going ahead," said Dhawal Ghanshyam Dhanani, Fund Manager, SAMCO Mutual Fund.

Nomura India said Asian stocks will likely see some pressure in the very near term given the hawkish outcome from the FOMC.
Rising US bond yields, stronger dollar and elevated energy prices, adding that they all are ingredients for a bad recipe for Asian stocks.

Market valuations

Nifty traded with 1-year forward PE of 19.3 times, which is 12 per cent above the 10-year average. Jefferies in a strategy note said its preferred yield-gap parameter (10-year bond yields less 1/Nifty PE), at 200 basis points is 69 basis points above average, pointing towards valuation discomfort.

"Globally, 'higher (rates) for longer' theme has gained traction from strong US economic data which has lead to 10-year US yield at a decade high of 4.35 per cent, coupled with a strong dollar," it noted.

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