Bloodbath in equity markets continued on Friday, with the BSE Sensex plunging 1,176 points, dragging the weekly decline to over 4,000 points. The Sensex finally settled at 78,041.59 points, down 1.49 per cent for the day. The NSE Nifty 50, too, slumped 364 points, or 1.52 per cent, to close at 23,587.50.
The crash comes in the wake of heavy selling by foreign institutional investors, and domestic investors have turned nervous, too, after the US Federal Reserve signalled fewer interest rate cuts next year. This has put the already falling rupee under more pressure against the US dollar; the rupee hit a record low of 85.10 to the dollar on Friday.
Lower than-expected GDP growth in the July-September quarter, as well as subdued corporate earnings, have also added to the pessimism among investors, while valuations in several pockets have been stretched for some time now.
"Disappointment regarding the slower-than-anticipated rate cuts by the US Fed has adversely affected global market sentiment. This bearish outlook is particularly impacting the domestic market, which is already contending with high valuations and low earnings growth," said Vinod Nair, head of research at Geojit Financial Services.
On Friday, 28 out of the 30-share Sensex ended in the red. Major losers included Reliance, Ultratech, L&T, Tata Consultancy Services, State Bank of India, Tata Motors, Axis Bank, Mahindra and Mahindra and Tech Mahindra. All these stocks were down in the 2-4 per cent range.
The selloff was broad-based, with mid and smallcaps seeing deeper cuts. The BSE midcap index closed 1,152 points or 2.4 per cent lower, and the smallcap index plunged 1,188 points or 2.1 per cent.
"Nervousness continued to grip investors, and stocks across the board went into a tailspin as the dollar's continued strength against the rupee has been prompting foreign investors to flee local equities and take shelter in safe-haven dollar assets," pointed Prashant Tapse, senior vice president of research at Mehta Equities.
He further pointed out that investors have also been apprehensive about incoming US President Donald Trump's trade policies when he takes charge in mid-January 2025, as his aggressive policies could further roil global markets.
According to data from NSDL, foreign portfolio investors sold Rs 1,981 crore worth of shares in the domestic market on Thursday, December 19. So far in 2024, till December 19, they had pumped in Rs 6,770 crore in Indian equities, significantly lower than the Rs 1.71 lakh crore they had invested in the 2023 calendar year.
"India's valuations have increased over the last three years, with markets now focusing on earnings growth. Valuations in some areas have been stretched as significant government spending over the past few years has helped create unrealistic growth expectations," according to Franklin Templeton India.
Disappointing earnings at a time of stretched valuations is a big concern among investors. Franklin Templeton pointed out that markets at the start of the financial year were estimating earnings for Nifty 50 companies at around 15 per cent for 2024-25, but it now appears that earnings growth will only be in higher-single digits.
Separately, government capital expenditure was down 15 per cent in the first half of the year, mainly due to elections. That has led to a "significant void" of about Rs 1.4 lakh crore, compared to budget projections, noted Franklin Templeton. This shortfall has impacted earnings in capex-sensitive sectors, while urban consumption has also slowed down, possibly due to weak wage growth, they added.
All this is adding to the nervousness among investors. The government capex is expected to pick up in the second half of this year, although it may not be able to bridge the shortfall completely, market analysts have said. How that pans out and the impact it has on the economy will have to be eyed. The upcoming October-December earnings season, which kick starts in January, will also be keenly watched, and any disappointment there could weigh down on stocks.
