On December 20, Indian equity markets ended on a weak note as broad-based selling dragged the indices lower. The Sensex plummeted by 1,176.46 points (1.49%) to close at 78,041.59, while the Nifty shed 364.2 points (1.52%), finishing at 23,587.50.
Sectoral indices across the board turned red, with realty stocks leading the decline, losing 4%. Auto, IT, capital goods, metal, telecom, and PSU bank indices all dropped by 2%. The BSE midcap and smallcap indices also took a hit, shedding over 2% each.
The Winners and Losers
While the markets saw widespread losses, a few stocks managed to buck the trend. Major Nifty losers included Trent, Tech Mahindra, M&M, IndusInd Bank, and Axis Bank. Meanwhile, stocks like Dr. Reddy’s Labs, Nestle India, HDFC Life, and ICICI Bank ended in the green.
What’s Behind the Market Meltdown?
Several factors contributed to the sharp decline in the markets. Let’s break them down:
1. The US Fed’s Stance
The US Federal Reserve’s decision to trim its benchmark interest rate by 25 basis points to 4.25-4.50% earlier this week was in line with expectations. However, the Fed’s revised outlook for rate cuts dampened global market sentiment.
Instead of the anticipated three or four rate cuts, the Fed projected only two quarter-point reductions by the end of 2025. This shift has unnerved investors worldwide, including in India, where the ripple effects are being felt.
2. Foreign Capital Outflows
Sustained selling by Foreign Institutional Investors (FIIs) has been a significant drag on Indian equities. Over the past four sessions, FIIs offloaded equities worth more than ₹12,000 crore, driven by factors such as a strengthening US dollar, rising bond yields, and the Fed’s conservative stance on rate cuts.
Although Domestic Institutional Investors (DIIs) have been stepping in to cushion the blow, the outflow of foreign capital has continued to weigh heavily on market sentiment.
“This week’s FII selling of ₹12,229 crore reflects their cautious stance. Large-caps, particularly in the financial sector, have felt the pressure. However, this trend may not sustain, and quality large-caps are likely to rebound,” said Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
3. Rupee Hits Record Low
Adding to the woes, the Indian rupee plunged to an all-time low of 85.34 against the US dollar.
A weak rupee not only deters foreign investors—by reducing their returns upon currency conversion—but also fuels inflation. Higher inflation, in turn, triggers tighter monetary policies, which weigh further on equity markets.
4. Macroeconomic Challenges
Fresh concerns about India’s economic health have also emerged. The trade deficit hit an all-time high in November, widening to $37.84 billion compared to $21.31 billion a year earlier.
Additionally, India’s GDP growth has been slowing for three consecutive quarters, with Q2 figures marking the lowest in nearly two years. These indicators suggest a weakening economic outlook, which has further dampened investor confidence.
5. Uncertainty in Corporate Earnings
Weak earnings in the first two quarters of FY24 have added to the uncertainty. Market participants are now eagerly awaiting Q3 results, with hopes pinned on a recovery.
“We expect a moderate recovery in Q3, but the real turnaround might come in Q4, driven by government spending and better agricultural yields,” noted Santosh Kumar Singh, Fund Manager at Motilal Oswal Mutual Fund.
Unless a significant recovery in earnings materializes, the markets are likely to remain subdued in the near term.
What Lies Ahead for Investors?
The ongoing volatility has left retail investors wondering about the way forward. Experts suggest adopting a contrarian approach by investing in quality large-cap stocks, which are expected to rebound as market conditions stabilize.
While the near-term outlook appears challenging, the fundamentals of the Indian economy remain strong, and any dips in the market could present attractive buying opportunities for long-term investors.
Stay tuned as we continue to monitor these developments and share insights on navigating the ever-changing market landscape.
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