Benchmark indices saw correction for the fourth straight session on Wednesday ahead of Union Budget 2021. In line with weak global equities, Sensex ended 937 points lower at 47,409 and Nifty fell 271 points to 13,967.
Yesterday, markets were closed on account of Republic Day. On Monday, equity indices closed 1% lower in a volatile session. Sensex ended 530 points lower at 48,347 and Nifty lost 133 points to 14,238.
Axis Bank, Titan, IndusInd Bank, HDFC Bank, Dr Reddy's, HDFC and Asian Paints stocks were among the major losers. On the other hand, Tech Mahindra, ITC, PowerGrid, UltraTech Cement, HCL Tech and Nestle India were among the top gainers.
Shares of market heavyweight Reliance Industries fell for the third straight session despite the conglomerate reporting a 13% rise in Q3 net profit.
On the currency front, Indian rupee rose for the sixth straight day to end 2 paise higher at 72.92 per dollar, despite heavy selling in the domestic equity market.
Here's a look at five factors that led to the fall in Sensex and Nifty today:
1. Union Budget
The sharp pullback in the last two sessions showed that markets have turned highly volatile, especially ahead of Budget 2021. Autos, Metals & Financials bore the brunt of selling as traders unwinded positions ahead of Union Budget on February 1.
Investors sold overvalued stocks such as Reliance Industries, HDFC and Infosys ahead of the Budget 2021. As per analysts, volatility is likely to continue till the Budget. Traders also suggested market being a bit apprehensive of some budget tax proposals which may not be market-friendly.
The reversal of FII from buyers to sellers in the last two sessions, right ahead of the budget also added to the nervousness in Wednesday's trade.
S Ranganathan, Head of Research at LKP Securities said,"Markets witnessed a 2% cut in indices today even as the IMF put out an impressive 11.5% growth for India in 2021, the highest for any major economy globally. Autos, Metals & Financials bore the brunt of selling as we saw unwinding ahead of the Union Budget. Absence of FII buying this week too added to the nervousness in Wednesday's afternoon trade."
2. Profit booking
Global stocks continued correcting in today's session, with some positivity registered in Asian counterparts, as investors locked profits after the recent rally, driven by hopes of a massive US economic stimulus from the new President Joe Biden.
In a similar move, broader indices on the domestic front continued to trade in the negative for the fourth day today, slipping from record highs, on the back of profit-booking by investors at high levels.
Market participants said overbought positions were settled on a global scale as investors took profits after a recent rally driven by better than expected Q3 earnings by Indian corporates, sustained FII inflows, hopes of a US economic stimulus and Covid-19 vaccine drive.
World markets have been flushed with liquidity amid Covid-19 stimulus and lower lending rate by central banks, which has led to an unprecedented rise in both global and domestic equities, increasing the disconnect between the market and economy. As per analysts, the world economy continues to face downward pressures from the sustained spread of coronavirus and will take some time to recover.
Markets are turning volatile amid an increase in coronavirus concerns around the globe, and delay in the vaccine shipments are also adding to the already increased concerns.
3. Derivatives expiry
Sensex fell over 1,000 points in afternoon trade today, while Nifty dropped 320 points intraday, ahead of Derivatives expiry day scheduled tomorrow. The market saw across the board selling, especially in heavyweights like Dr Reddy's, IndusInd Bank and Axis Bank that fell up to 4.41%. Traders said volatility is expected ahead of the Derivatives expiry day.
Sneha Seth (Derivatives Analyst, Angel Broking) said, "January series is a historical one as the benchmark index clocking fresh record highs tad above 14750. However, in merely last four trading sessions all the gains during the series have been wiped-off. In addition, we also witnessed the volatility index surging to 24.40, further rise beyond 25.50-26 may be a sign of concern as we haven't seen INDIAVIX closing at such higher levels in last five series. The benchmark index has concluded today's session at a very crucial level, hence, follow-up move on the expiry day is very important to watch. At present, we would advise traders avoiding any aggressive bets on the monthly expiry ahead of the key event."
4. Weak global cues
Most Asian equities earlier turned positive after the International Monetary Fund (IMF) raised its growth forecast to 5.5% for the global economy this year. That's a 0.3 percentage point increase from October's forecasts.
Later, most indices erased early gains and closed in red territory, as investors continued to monitor the situation surrounding the coronavirus pandemic and US stimulus. Traders said investors watched developments around Covid-19 vaccine against the mutating coronavirus which has produced a number of potentially more infectious variants.
Further, profit booking was anticipated in global equities after the Biden administration signalled that it could be open to tweaking eligibility for future stimulus checks. President Joe Biden's $1.9 trillion proposal calls for $1,400 direct deposits, but the plan has drawn critiques from a bipartisan group of lawmakers because of its lofty price tag.
Investors were also cautious ahead of the new policy statement from the Federal Reserve as the US central bank began its two-day meeting on Tuesday.
"It is well-known that a fall in FIIs 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 FII selling," said Vinod Nair, Head of Research at Geojit Financial Services.
5. Technical outlook
As per traders, valuations of major stocks cooled off in the four-day fall, after the rally to record levels this month. All major sector-based indices except for FMCG closed in red today, with almost 3% drop in banking and over 2% fall in realty, pharma, metal and auto index. Market breadth was negative with midcap and small-caps ending weak. Meanwhile, the volatility index NSE VIX gained 4.9% today.
Nifty 50, that is already trading in the overbought zone, fell from the key level of 14K today. With today's fall, the equity market has turned negative year-to-date as Sensex and Nifty fell 0.71 and 0.16%, respectively.
Ashis Biswas, Head of Technical Research at CapitalVia Global Research Limited - Investment Advisor said," The market witnessed a strong downward trend and a decisive breakdown below the support level around the Nifty 50 Index level of 14000. While a recovery above 14000 is the key to change the short-term bearish outlook. Market is sustaining below this level to gain downside momentum and open the gate for a movement until 13670. We have observed the momentum indicators like RSI, MACD to turn negative and market breadth to deteriorate significantly, further strengthening the view of a short-term bearish outlook."
Ajit Mishra, VP - Research, Religare Broking said, "Markets slipped further lower on Wednesday as selling pressure continued across the board. We're are not surprised with the recent fall and expect Nifty to test 13,700. However, it's a healthy correction before the event and investors should use it to accumulate fundamentally sound counters on dips. Traders, on the other hand, should maintain extra caution due to the expected rise in volatility ahead. We thus suggest trading through options or taking selective trades in cash segment."Sensex plunges over 1,000 points on profit-booking ahead of Union Budget