After breaching the 40,000 mark for the first time in six months, the benchmark Sensex Monday crashed 1,382 points from the day’s high to close at 38,628.29 as a fresh India-China flare-up was reported in Ladakh and worries grew over the contraction in India’s first quarter GDP. Implementation of new margin norms from September 1 got added to this mix and led to a sharp sell-off .
The Sensex fell 839 points or 2.13 per cent over Friday’s closing and Nifty at NSE fell 260 points or 2.23 per cent to close at 11,387. The fall was across the market — mid and small-cap indices at BSE fell 3.8 per cent and 4.4 per cent respectively.
While concerns over the market’s over-valuation have been raised by various participants and even by RBI Governor Shaktikanta Das, many feel the markets were waiting to correct and news from the Line of Actual Control was the trigger.
Correction and caution
As of Friday, Sensex had regained almost 85% of its losses between Jan 17 (when it touched 41,945) and March 23 (when it fell to 25,981). The markets may see more correction in the short term on account of GDP and LAC concerns and experts advise caution.
“Markets have been in overvalued territory for some time now and have been waiting for some reason to correct. I believe the China factor came as a reason for the correction and for investors to book profits on Monday. Also, anxiety has been there around GDP numbers,” said CJ George, MD, Geojit Financial Service.
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Red-flagging the GDP numbers that came after market hours, George said: “This is not the time to invest when the market dips as investors need to very careful. Investors should look for companies that did well in Q1 and held on to their businesses as they will do reasonably well when the economy revives”.
“The GDP number for the first quarter at -23.90 per cent, is a deep fall, the worst ever, which is the direct consequence of the pandemic and the lockdown. A fall close to -20 per cent was more or less expected by a number of market participants,” said Joseph Thomas, Head of Research, Emkay Wealth Management.
Another factor that recently pushed up markets was the significant foreign inflows — around Rs 46,000 crore in August, the biggest monthly inflow in the calendar year 2020.
This despite concerns being expressed across the board. On August 21, the RBI Governor warned of a disconnect between sharp surge in stock markets and the state of real economy, as surplus global liquidity is driving up asset prices across the world.
He forecast that there will “definitely be a correction” in stock markets and the central bank is prepared to take all steps required to maintain financial stability.
Another factor that market participants say played a role in Monday’s fall was the implementation of new margin rules from September 1. According to Sebi circular, brokerage firms were required to square up all open positions on August 31, 2020 and from September 1 onwards, investors will only be allowed to trade in the market with 20 per cent margin money.
“The tsunami of negative news shook the entire market. The implementation of new margin norms, clashes between India and China, anticipation of a sharp contraction in GDP, the highest number of COVID 19 cases being recorded in a day and concerns of the virus spreading to rural India all contributed to the fall,” said Shrikant Chouhan, executive VP, at Kotak Securities.
These were largely domestic factors – leading indices did not witness such a sharp decline. While Nikkei in Japan closed with a gain of 1.1 per cent Monday, the premier indices in Germany and France were up by 0.2 and 0.3 per cent respectively in afternoon trading hours. Hang Seng in Hong Kong closed after falling 1 per cent and FTSE in UK was down just 0.6 per cent.
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