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Business News/ Market / Stock-market-news/  Is the party over for Indian stock markets?
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Is the party over for Indian stock markets?

Sensex, Nifty close at lowest levels in five months; bonds affected by pressure from global debt markets sell-off

Photo: Hemant Mishra/MintPremium
Photo: Hemant Mishra/Mint

Mumbai: Benchmark equity indices tumbled on Wednesday to their lowest closing levels in almost five months, hit by strong selling on algorithmic trading platforms, as investors fretted over rising oil prices, a decline in industrial activity and tax demands slapped on foreign funds.

The 30-share BSE Sensex closed 2.63%, or 722.77 points, lower at 26,717.37 points. The National Stock Exchange’s broader 50-share Nifty shed 2.74%, or 227.80 points, to close at 8,097 points. It was the lowest close since 17 December for both indices.

The immediate trigger, dealers said, was a slump in Nifty futures on the Singapore exchange, where they are trading at a discount to the domestic NSE index futures.

That sparked heavy selling in domestic shares, especially in algorithmic trades, which account for a third of the total volume in Indian cash shares and almost half the volume in the derivatives segment, analysts said.

“Nifty was already below 200-day average and today it also broke Tuesday’s low, which generated strong selling on algo platforms," said Nilesh Dedhia, founder of NTD Trading, which specializes in providing algorithm-based trading platforms.

Bonds were also affected, with pressure coming from a sell-off in global debt markets. The benchmark 10-year bond yield closed 4 basis points higher on the day at 7.89%. Bond yields move in opposite direction to prices.

The Sensex is down 2.8% for the year to date, and is the worst performing major equity index after Turkey’s Stock Exchange National 100 Index.

The sharp fall in indices comes at a time the National Democratic Alliance (NDA) government is facing questions about its ability to push key reforms through Parliament and manage the economy, its handling of an ongoing agrarian crisis and the tax dispute with foreign investors.

The Bharatiya Janata Party-led NDA rode to power on a governance and reforms platform last year, replacing the United Progressive Alliance (UPA), which was voted out after 10 years for its mishandling of the economy and the involvement of some of its key functionaries in corruption scandals.

The Sensex rose 55.6% between September 2013—when the BJP named Narendra Modi as its prime ministerial candidate—and 4 March, and has since fallen 9.1% .

“It is very difficult for anyone to match such high expectations, and such over-hyped trades end badly. We saw that to an extent in 2011, two years after the UPA won the 2009 elections, and a similar thing is happening now," Shankar Sharma, vice-chairman and joint managing director of First Global Securities Pvt. Ltd, said in a phone interview from Dubai.

“The impact is huge simply because people are now saying, ‘We gave you (BJP) 282 seats, what did you give us?’."

Sharma isn’t alone.

“So far, the new government has done nothing but talk, and it is a shame because Modi had experience, he said he knew what needs to be done—he campaigned for many months saying he knows how to fix India, but he has done very little," commodities trading guru and hedge fund manager Jim Rogers said in an April interview to Mint Asia.

The sell-off results partly from uncertainty that has gripped the markets since April over the minimum alternate tax (MAT) being demanded from some foreign investors. MAT is a tax paid by entities that do not pay corporate income tax because of exemptions and other incentives.

The sentiment across equity markets weakened after a fall in US and Asian stock markets. Crude oil prices also hit their highest levels of 2015, and have gained 48.14% to $69.05 per barrel from the lows seen in mid-January.

Foreign institutional investors (FIIs) have been net sellers of Indian equities in 11 of the last 12 sessions of April, data from market regulator Securities and Exchange Board of India shows.

They were net sellers of Indian shares to the tune of 1,699.6 crore on Wednesday, according to provisional data from the NSE.

Subdued corporate earnings and a survey that indicated a slump in private sector activity also hurt investor sentiment.

The HSBC India Composite Purchasing Managers’ Index that gauges private sector activity fell to a six-month low of 52.5 in April as demand remained soft.

“The Indian economy is a like truck with a messed-up gearbox. More petrol or fresh paint or new tyres or a new driver-cum-mechanic won’t be successful in making it move faster until the gearbox is fully fixed," Rajeev Malik, senior economist at CLSA Singapore, said in an interview with Mint Asia on 15 April.

“Fixing the gearbox will take time. Investment recovery continues to be held back by structural factors, institutional issues, supply-side constraints and policy uncertainty," he said.

India VIX—an indicator of near-term volatility in the market—rose 13.3% to 19.67, its highest close since 26 February, hinting at more swings in the days to come.

On the derivatives front, FIIs have been unwinding their long positions, and are simultaneously creating short positions, which is adding to the pressure in the market, said Yogesh Radke, head of quantitative research at Edelweiss Securities Ltd.

An increase in short positions suggests that investors expect the market to fall further.

According to Sachidanand Uttekar, equity technical analyst at Motilal Oswal Securities Ltd, Nifty fell below the 200-day EMA (exponential moving average) of 8,189 points, and closed nearly 100 points lower from that level.

If the selling intensity continues, Nifty could test 7,950 on Thursday, Uttekar said.

“People tend to be sceptical when the bull run starts. Most people enter the party late, they buy late, they try to compensate by buying more than they should. Lot of brokerages would have cut positions, as margins were falling short. They seem to squaring up the open positions by selling due to mark-to-market distress," said Vijay L. Bhambwani, technical analyst and chief executive of bsplindia.com.

Sharma of First Global said the market is only “marginally positive" in dollar terms since the election results to date.

“More than the new GDP (gross domestic product) numbers, I would say corporate earnings to an extent are a more trustworthy indicator of economic health, and they are in a very bad state," said Sharma

“That said, I think there is not much room for panic from here. I would rate Indian equities—more specifically the small-cap and mid-cap space—a buy, solely because interest rates are very high, and they must go down from here. RBI (Reserve Bank of India) will have to be aggressive about it," Sharma said.

He expects the central bank to cut interest rates by 300 basis points between now and the end of 2016.

One basis point is one-hundredth of a percentage point.

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Published: 07 May 2015, 12:46 AM IST
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