Stock markets fell sharply on Monday (December 20), with the main indices plummeting by up to 3.29 per cent in intra-day trade as sustained foreign investor selling and policy tightening plans by global central banks amid rising cases of the Omicron variant hit sentiment.
The benchmark Sensex, which had fallen by 1,879 points at one stage, was quoting 1,429 points (2.51 per cent) down at 55,582.51 at 2 pm, while the NSE Nifty index was down 448 points (2.64 per cent) at 16,537.15.
Monday’s sell-off was one of the most significant selling pressures witnessed recently on Dalal Street. The RIL stock was trading 3.19 per cent down and HDFC Bank showed a decline of 3.01 per cent. Tata Steel (4.76 per cent) and Tata Motors (5.01 per cent) were also trading lower. The BSE mid-cap index fell 3.86 per cent, and the small-cap index fell 3.60 per cent in intra-day trade.
Foreign portfolio investors (FPIs) have been pulling out funds from Indian markets in the last three months in the wake of signals from global central banks that interest rates are likely to go up in the coming quarters.
In December alone, FPIs withdrew Rs 25,252 crore from stock markets, and Rs 73,526 crore ($ 9.8 billion) between October 1 and December 17, according to figures available from the National Securities Depository Ltd (NSDL).
In calendar year 2021 so far, FPIs have withdrawn Rs 47,126 crore from the stock markets.
Year-end FPI selling is also in play, as they are booking profits to show higher returns and profits.
Major global central banks like the US Federal Reserve have already indicated that the ‘easy money’ policy will be tapered down, and interest rates are likely to be jacked up to tackle rising inflation. The Bank of England increased the policy rate on Friday.
If the US Fed and other major central banks hike rates, FPI outflows will likely intensify in the coming weeks. The Fed, which is seeking to ramp up efforts to control inflation that is at an almost four-decade high, has signalled that the reign of easy policy is coming to an end.
The planned $30 billion per month acceleration of tapering will bring pandemic-driven bond purchases to a close in March 2022, setting the stage for a hike in the Fed funds rate. If inflation rises, the RBI is also likely to unwind its accommodative policy and hike rates next year.
The rising cases of the highly transmissible Omicron variant have prompted investors to be cautious. Investors are mostly worried about the likelihood of travel restrictions and lockdowns, which will impact the economy. The Indian economy, which is on the comeback trail after the disruptions of the first and second waves of the pandemic, is likely to take a hit if Omicron cases rise sharply in India.
Going forward, the emergence of the Omicron strain has heightened the uncertainty in the global macroeconomic environment, accelerating risks to global trade with resumption of travel restrictions/ quarantine rules at major ports and airports, the RBI said in its ‘State of the economy’ report last week.
Analysts say that long-term investors should stay invested as the prospects for the Indian economy remain bright. “They should not panic and sell stocks as a knee-jerk reaction to the sell-off on Monday. Markets had plunged last year as well, but they recovered sharply as things were brought under control. Besides, domestic institutions including mutual funds have been buyers in the market these days,” BSE dealer Pawan Dharnidharka said.
Prashant Tapse, Vice President, Mehta Equities, said, “As long as headline inflation and Omicron risks remain elevated, investors need to remain nimble footed as the economic recovery will probably be in a zig zag mode. The ongoing pessimism indicates that the recent dramatic crash is nowhere near over.”
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