Indian stocks on Thursday tanked like a house of cards on not-so-dovish comments by the Fed Chairman Jerome Powell. The poor show on the first day of August followed the worst July for the domestic market since 2002.
What made investor eyes rolling was the fact that India was the worst-hit major markets globally. Surely, domestic factors too played a role in the selloff.
Here are the factors that pulled domestic stocks lower:
US Fed comment: The US Fed cut policy rate by 25 basis points overnight. But Fed Chairman Powell characterised the rate cut as a mid-cycle adjustment to policy. Markets took it as a sign that sharp further cuts were not imminent, Reuters reported. Later in a news conference, Powell said Wednesday’s move was not the beginning of a long series of rate cuts.
Panic in Asia, Europe: By afternoon session, European shares had joined Wall Street and Asian markets to trade in the red. The Fed outcome dampened hopes of future cuts in US. The pan-European benchmark stock index STOXX 600 fell 0.2 per cent, with energy and mining giants the biggest drag as oil, iron ore and copper prices dipped. Asian markets, other than India, were down up to 1 per cent earlier in the day.
Outflow vulnerability: Mixed earnings and the recent market-unfriendly Budget announcements have made India vulnerable to foreign outflows. Data suggests FPIs pulled out over Rs 11,000 crore worth of domestic shares in July. “No significant US rate cut would mean that the incremental flows into emerging markets may not be strong. That does not board well India at least in the short run,” said Hemang Jain of Sharekhan.
Weak rupee: A sharp 41 paise fall in rupee against dollar has made the matter worse. The domestic currency on Thursday fell to a low of 69.20 level against 68.79 level in the previous session. A weak rupee eats into the takeway profit of FPIs and hence make investment unattractive. Geoff Dennis, EM Commentator.
“The dollar is firmer on the back of Powell’s statement. It tends to be negative for the emerging markets. Even if the emerging markets were to take off on dollar weakening and money starts moving out of the US, India would not outperform,” he said.
Poor market breadth: The market breadth has been pretty poor of late, partly reflecting concerns over earnings. On Thursday, three stocks fell for every stock that rose on BSE. It suggests the bears are at the driving seat and that the pain may be here to stay. “We are now slashing our one-year Nifty target to 11,300-11,800 from 12,200-12,700,” PhillipCapital said last week “Consensus Nifty FY20/21 EPS is currently forecasting a growth of 23 per cent/18 per cent with nominal GDP growth assumption of 10 per cent – which indicates high risk of meaningful earnings downgrade,” it said.