Domestic equities saw their worst week in nearly two months despite a minor relief rally on Friday, as foreign institutional investors pressed the sell button and many domestic investors chose to take risk off the table due to uncertainty amid the ongoing General Elections. On top of this, the Reserve Bank of India’s draft norms on project financing further spoil the market sentiment.
The Nifty 50 ended the week 1.9% or 421 points lower at 22,055.20 points, and the Sensex fell more than 1,200 points or 1.6% to 72,664.47 points. With this, the indices also snapped a two-week winning streak.
While the indices ended lower for the week, the rebound seen on Friday softened the blow of the selling intensity. Friday was only the third session in 10 days when the benchmark Nifty 50 registered gains.
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The selling has been driven by foreign institutional investors (FIIs), who have net sold shares worth over Rs 21,000 crores in just seven sessions.
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“The way the elections kicked off with low voter turnout, it is spooking the market to some extent. This is also evident in volatility index,” said Sriram Velayudhan, senior vice president at IIFL Securities.
India VIX, which reflects the volatility expected in the market in next 30 days, has soared a whopping 81% in 12 days to 18.5. Market participants believe it will further rise towards 22-25 levels in the near-term until the verdict of the Lok Sabha elections are declared on Jun 4.
Experts said the uncertainty has given investors a reason to book some profits at a time when the market were hovering around their lifetime highs and valuations too were rich. As a result, many analysts see the ongoing market correction as a healthy trend.
While the selling has been broad-based, banks have been among worst hit. Even as the benchmark indices found some relief on Friday, the Nifty Bank index ended lower for the ninth consecutive session.
The sectoral index fell 0.1% with State Bank of India, Kotak Mahindra Bank and Bank of Baroda dragging the index. Bank of Baroda was the worst hit as it fell nearly 3% post its earnings.
The overall sentiment in the banking space has been hit throughout the week as RBI’s draft norms on project finance has raised concerns over possibility of higher provisions and a consequent hit to profitability for the sector.
Apart from these factors, earnings season and global macroeconomic factors have been driving market momentum. While the earnings performance for January-March has broadly been in line with expectations, market participants said it still showed that the higher valuations were probably not justifiable.
Investors are also factoring in uncertainty over the timing of rate cut by the US Federal Reserve. While earlier the anticipation was that the Fed will start cutting rates from June, that is, out of the window now following stronger-than-expected US inflation data.
“We expect the current trend in the domestic markets to continue in the short term due to election-led uncertainties. In the data-hectic week ahead, investor attention will be focused on the release of India and US CPI data, Europe and Japan’s GDP releases, and the FED chair speech,” Vinod Nair, Head of Research, Geojit Financial Services.
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