Opinion Express view on market fall: Investors need more clarity

On Monday, stock markets crashed, with the BSE Sensex ending the day down 1.6 per cent. The Indian markets were, however, not an outlier. Some of the other Asian markets also witnessed weakness. The Nikkei index was down 1.5 per cent while the Hang Seng fell by 0.4 per cent. In the Indian markets, the selling pressures were broad-based, not just limited to the larger companies. The BSE Midcap index fell by 2.4 per cent, while the Smallcap index declined by more than 3 per cent. The Nifty VIX, a fear gauge, was up 15.6 per cent.

The triggers for the fall appear to be both global and domestic. On the global front, investors are apprehensive about the possible changes to US policy after Donald Trump is sworn in as president on January 20. Concerns over the possibility of higher tariffs weigh heavy. The policy stance of the US Fed is of equal concern. The first meeting of the Fed which will be held later this month will provide greater clarity on how tight its monetary policy is likely to be. This will have implications for the dollar and the rupee. On the domestic front, after a depressed earnings quarter (July-September), there are concerns over the performance of the corporate sector in the just concluded quarter (October-December). While some are hopeful of a bounce back, others are circumspect, expecting earnings to be subdued. There is a view that after the slump in the second quarter, the economic momentum has picked up, what is less clear is the extent of the pick up. Government spending also remains weak. The Centre’s capital expenditure, which has been a key driver of growth in recent years, has been waning — during April-November it was actually 12 per cent lower than last year — and foreign investors appear circumspect. In the first few days of the new year, foreign portfolio investors have been sellers with (net) investments of -$836 million. Some reports suggest that investors may have also been spooked by the virus outbreak in China.

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Clarity on some of these issues will emerge over the next few weeks, prompting investors to reassess their positions. Alongside, how the upcoming Union budget and the February meeting of the monetary policy committee provide support to the economy will also influence sentiment.