Rs.6.15 trillion wiped out

In the last 3 trading sessions of Oct-21, the market cap depletion was to the extent of Rs.615,000 crore. The result was that Nifty and Sensex closed almost flat for the Oct-21. In addition, the Nifty closed well below the support level of 18,000 while the Sensex also cracked below 60,000. This happened amidst a lot of market selling with FPIs being heavy sellers consistently over the last few days. There were broadly 3 factors that led to this sharp fall in the indices. 

Spate of FPI downgrades

One of the major reasons for the sharp fall in the markets and the relentless FPI selling was the spate of downgrades. Three major global names viz. UBS, Morgan Stanley and Nomura downsized their view on Indian equities from being overweight to neutral. They cited steep valuations as the key driver for this view shift although the 3 brokerages stayed positive on the structural India story. Their concerns stemmed from the fact that the MSCI India index had gained 27% at a time when the MSCI EM index had given negative returns. This made other Asian markets relatively attractive. 

Liquidity was a key concern

This concern over market liquidity stems at two levels. Firstly, there is almost an assurance now that the US Fed would embark on its taper program by the end of this year. Taper means cutting down on asset purchases to reduce the Fed induced liquidity in the system. This is likely to reduce the flow of virtual free money from global markets into India. The second liquidity issue is domestic. Despite sounding dovish in its credit policy, the RBI announced a variable rate repo (VRR) worth Rs.50,000 crore to suck out the excess liquidity. This is what actually set off the panic buttons for investors leading to a steep sell-off. 

Inflation is the real bugbear

Fundamentally investors worry about inflation at multiple levels. The Fed chair has made it clear that high inflation is not going away in a hurry. If India sticks to its dovish policy then it risks yield gap narrowing with the US and the risk of capital outflows. But what is pinching Indian stocks is the persistent cost–push inflation caused by supply chain level constraints. Most of the FMCG stocks took huge hits after the quarterly results showed distinct signs of the cost push inflation assuming alarming levels in input cost economics. If growth is tepid and inflation is high, it creates a sticky situation wherein companies have to face higher levels of inflation without the antidote of higher growth rates!