Black Wednesday: What led to a market crash of 2.23%?

The big plunge in Sensex, Nifty

The BSE’s 30-share Sensex fell 1,628.01 points, or 2.23 per cent, to close at 71,500.76. The broader Nifty 50 lost 460.35 points, or 2.09 per cent, to end at 21,571.95 on Wednesday. Both the indices opened gap down on Wednesday with the Sensex opening at 71,998.93, down 1,130 points, and the Nifty losing 385 points to open at 21,647.25.

The Nifty Bank declined 4.28 per cent or 2,065.65 points, to close at 46,064.45, mainly due to a sharp fall in HDFC Bank.

The fall in both the benchmark indices comes two days after the Sensex and the Nifty touched an all-time high of 73,327.94 and 22,097.45. The rise was driven by buying in information technology (IT) stocks. “There are challenges in the near term such as persisting conflict in the Middle East and worries over delay in US Fed rate cut, which could dampen investors’ sentiment going ahead,” said Prashanth Tapse, Senior VP (Research), Mehta Equities.

HDFC Bank leads the rout

HDFC Bank’s scrip tanked 8.16 per cent to end at Rs 1,542.15 apiece, a day after the bank declared weak results for the quarter ended December 2023. The bank reported a 33.5 per cent rise in its standalone net profit at Rs 16,370 crore in Q3 FY 24. Its NIM stood at 3.4 per cent on total assets, and 3.6 per cent based on interest earning assets in the October-December 2023 quarter. “The underperformance in its net interest margin seems to be the most worrying point for investors,” said Sheersham Gupta, Director and Senior Technical Analyst, Rupeezy.

While downgrading the price target, market analysts said that the lower liquidity coverage ratio (LCR) and slower deposit growth may limit expansion of net interest margin (NIM) of the bank going forward. The other bank stocks that declined the most included Kotak Mahindra Bank, Axis Bank and IDFC First Bank.

Fed in no hurry to cut rates, US yield rises

The selloff in the benchmark indices was seen after Christopher J Waller, Governor, Federal Reserve System on Tuesday, suggested that there was less urgency for a rate cut. Investors were earlier expecting that the reduction in interest rate by the US Fed would start from March this year. “The global negativity will come from the rising bond yields in the US (the 10-year yield is at 4.04 per cent) responding to concerns that the sharp rate cuts expected from the Fed this year may not materialise,” said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Now indications are that the US Fed is unlikely to cut in March and the total cuts in 2024 may not be five or six that the market had partly discounted. “This will be a drag on global equity markets,” he said. In a speech delivered at The Brookings Institution, Washington, D.C., on Tuesday, Governor Waller said the data that have been received in the last few months is allowing the committee to consider cutting the policy rate in 2024.

In its December policy, the US Federal Reserve, while keeping the key interest rate unchanged at 5.25-5.5 per cent, hinted at rate cuts in 2024. The US central bank signalled that they expect to make three quarter-point cuts to their benchmark interest rate in this year.

Foreign investors tend to stay away from India when US yield rises and stocks become overvalued.

Markets overvalued?

Analysts say that the market was ripe for a correction as it had run up very fast in the last few weeks. “Stock market valuations are also expensively valued compared to other global stock indices and investors would wait for more positive cues now to extend their equity exposure,” Tapse said.

Even though the economy is doing well and corporate earnings are good, all these positives are in the price and the valuations are elevated warranting a correction, said Vijayakumar of Geojit Financial Services. The mid and small cap space is highly overvalued and is sustaining at high levels only by the high liquidity in the system. Some profit booking and moving the money to fixed income can be considered now, said an analyst.