After rallying for six consecutive sessions, benchmark indices on Thursday corrected for the third straight session as traders turned cautious in the run-up to the announcement of five state elections' results next week.
The outcomes of these elections is what the market is predominantly keeping an eye out for. The other factors that will influence sentiment would be the outcomes of the OPEC meet later in the day and US Federal Reserve policy meeting next week. The RBI's Monetary Poliy Review was along expected lines.
"Of the three key events in December, the trade truce between US-China and RBI monetary policy has played out without any damage. The OPEC meeting today and outcome of the state elections are key events ahead that could lead to some short term volatility," said Gaurav Dua, Head of Research, Sharekhan by BNP Paribas. "We remain buyers on dips in equities."
The Sensex closed down 572.28 points or 1.59 percent at 35,312.13 and the Nifty plunged 181.70 points or 1.69 percent to 10,601.20.
All sectoral indices and the broader market traded in line with the benchmarks. The NSE Midcap, Bank, Auto, FMCG, IT and Realty indices were down 1-2 percent.
Here are 5 key factors keeping the market subdued right now:
Caution Ahead of State Elections Results
The outcomes of the five state elections seem to be crucial for the market as they will likely set the tone for the general elections next year. Voting in Rajasthan and Telangana will take place on December 7 and the counting of votes in all the states will be done on December 11.
Of these five states, Madhya Pradesh and Rajasthan are key ones for both national parties -- BJP and Congress. The BJP, which is in power at the Centre, is the incumbent party in Chhattisgarh, Madhya Pradesh and Rajasthan.
Kotak institutional Equities pointed out that opinion polls suggest a win for BJP in Chhattisgarh, a loss for it in Rajasthan and a close contest in Madhya Pradesh. "The market expects the BJP to retain Chhattisgarh and Madhya Pradesh but lose Rajasthan," the brokerage said.
A 3-0 score for BJP may result in an extension of the market's current rally, while a 0-3 or 1-2 loss (Madhya Pradesh and Rajasthan) may result in a sharp correction. This is because the market will likely take a dim view of BJP's prospects in the general elections next year, given the large contribution of these three states in its 2014 win.
Rupee back at 71 to the dollar
The rupee went back to 71 to the dollar after trading around 69-70 for the last few sessions because of a weak dollar and a sharp correction in crude oil prices.
The market seemed to be apprehensive of the volatility in the foreign exchange market, and turned cautious ahead of the election results next week and because of a sell-off in the US market.
"Investors would be tracking outcome of the OPEC meet while the US President has reiterated that the OPEC should consider lower oil prices that is positive for the global economy," ICICI Direct said.
The currency was down 55 paise at 71.01 to the dollar at the time of publishing this article.
Crude oil volatile ahead of OPEC meet
Crude oil prices have been quite volatile as investors around the world maintained a cautious stance ahead the OPEC meeting later in the day.
Globally, most experts expect OPEC members to cut supply by 0.5-1.5 million barrels per day, because over the last one month, oil prices have fallen more than 30 percent to around $60 a barrel due to oversupply, especially after the US allowed some countries to import oil from Iran.
"The OPEC meeting on December 6 will be crucial from the inflation perspective as the members may consider constricting supplies in view of the falling oil prices. Additionally, there is a risk of the market misunderstanding the stance of the US Fed, which may not be in a position to hold rates longer in an US environment characterized by ultra-low unemployment and inflationary tendencies. Collectively, these factors may not give the RBI a long enough breather on the rate front," Karan Mehrishi, Lead Economist at Acuité Ratings and Research said.
Global Weakness Continues
Global markets continued to correct sharply for the second consecutive session ahead of a closely watched meeting by the Organization of the Petroleum Exporting Countries (OPEC).
Japan's Nikkei fell 1.91 percent, China's Shanghai Composite dropped 1.68 percent, South Korea's Kospi 1.55 percent and Hong Kong's Hang Seng 2.47 percent, following negative lead from Wall Street.
On Wednesday, Dow Jones Industrial Average, S&P 500 and Nasdaq Composite ended 3-4 percent lower.
The Nifty50 fell near 10,600 levels after hitting 10,900 levels few days back, losing nearly 300 points in these three consecutive sessions ahead of key events.
The index has also broken its 200-daily moving average, which was placed around 10,749, the crucial level to watch out for.
The cautious trade is likely to be continued at least till Friday when the state elections exit poll will get announced later in the day, experts said.
"If the index decisively breaches its 200-day moving average then this correction will eventually get extended towards 10,489 levels," Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in told Moneycontrol.
He said on the upsides strength will not be resumed unless Nifty50 registers a close above 10,941 levels.
Meanwhile, as we are heading close to an important binary event traders will be better off by staying away from short term bets atleast till Friday, he added.