After scaling new highs, the Indian stock markets have been experiencing a bout of volatility. The BSE Sensex began last week by crossing the 73,000 level. Over the course of the next few days, it fell 2,141 points or nearly 3 per cent. On Friday, it recovered marginally, ending the day up 0.7 per cent. From the beginning of this year, the Sensex is down 1.17 per cent. However, this weakness does not reflect in the broader market. Over the same period, the BSE mid cap index is up 3.63 per cent, while the small cap index is up 3.81 per cent.
The recent market volatility can be traced to several factors. Investor sentiment soured after HDFC Bank, the leading private sector bank, posted weaker than expected third quarter results. The bank fell more than 8 per cent on Wednesday and around 3 per cent on Thursday, dragging down the benchmark index. The fallout could be seen in stock prices of other private sector banks. Since January 15, the NIFTY Private Bank index is down around 4.5 per cent.
Alongside, remarks by US Federal Reserve official Christopher Waller also seemed to have caught investors off guard. Waller cautioned that the Fed might not cut rates as quickly as many investors had believed — following the US Fed’s December meeting in which it had indicated the possibility of three rate cuts in 2024, many had penciled in the first rate cut in March. Waller’s comments, which come after the minutes of the December meeting that showed that most officials were in favour of keeping interest rates high for some time, seem to have dented investor exuberance over the policy pivot by major central banks. Foreign portfolio investors have also changed tack. After $1.08 billion in November and $7.93 billion in December, net investments by FPIs have turned negative (- $1.56 till January 19). However, the Sensex is currently trading at a PE ratio of 25, higher than its average over the past decade.
A combination of global and domestic factors will influence markets. Towards the end of this month, the US Fed will hold its first meeting of this calendar year. This meeting is expected to provide clues on when the central bank is likely to begin cutting rates. Alongside, the continuing crisis in the Red Sea will also be felt across markets. On Friday, Brent crude oil rose to $78.51 per barrel as a growing number of oil tankers diverted course from the region. On the domestic front, investors will turn their attention to the interim budget and the monetary policy committee meeting that is slated a few days thereafter. In the following weeks, the focus will shift to the 2024 general elections.
