Bloodbath on Dalal Street: Four factors behind freefall in Nifty, Sensex

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The volatility index India VIX jumped 16 percent to 18.97 levels today.

All sectors, including information technology, were bleeding on December 20. Nifty IT, which had managed to hold on to gains on Friday on the back of upbeat demand outlook for the industry, also buckled under the overall negative sentiment.

Metals, real estate and financials seemed to be dragging the benchmark indices lower.

While the Nifty Bank fell 3.3 percent, Nifty Realty was down 4.9 percent and the metals index was down 3.8 percent.

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Companies with higher global exposure were under massive pressure, with Motherson Sumi, Tata Motors, and Bajaj Auto down 5 percent, 4 percent and 1.9 percent, respectively.

Bandhan Bank, SAIL, Jindal Steel and Bajaj Finance were some of the biggest losers on the Nifty 100 index.

Twins HDFC and HDFC Bank, with high foreign portfolio investor participation of 72 percent and 39 percent, were down 2.5 percent and 3.3 percent.

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Despite a positive development with the Competition Commission of India revoking its approval to Amazon and Future Group’s 2019 deal, Reliance Industries was 1.7 percent in the red at Rs 2,300 on the BSE. However, Future Retail was up 20 percent at Rs 57.50.

Let’s check out the factors that led to the market rout:

Omicron Worries

The rapidly spreading Corona virus variant continued to spook investors as most countries in Europe scuttle to control the rising number of infections. Market experts believe another series of strict lockdowns could massively hurt the economic recovery prospects just a year after the global economy started taking baby steps to normalisation.

The Netherlands is the latest in the region to have imposed a “painful” lockdown right in the middle of festival season. The UK had already imposed travel restrictions, and countries like Germany and Austria were just recovering from their latest waves.

Also read: Budget 2022: Sectors linked to investment economy to fare well, says Ashish Shanker of Motilal Oswal Private Wealth

Global Spill-off

Wall Street finished lower on Friday, weighed down by major tech giants as investors worried about Omicron and continued to digest the Federal Reserve’s decision to end its pandemic-era stimulus faster.

All three main US stock indices ended with a decline for the week after the Fed on Wednesday signalled three interest rate hikes by the end of 2022 to fight inflation.

On December 20, Asian indices fell and oil prices slid due to the same Omicron variant concerns and tighter restrictions in Europe.

Stay up-to-date on all Omicron related developments here

While Japan’s Nikkei fell 2.2 percent to 27,915 points, Hang Seng was down 1.5 percent at 22,858 points. Korea’s Kospi was down 1.8 percent and the Shanghai Composite had fallen 0.7 percent.

Policy Tightening

A major reason that has caused the spiralling effect on the equity markets in Asia is the hawkish stance by the central banks world-wide.

Since the Fed expressed its views on aggressively retreating from its pandemic-led stimulus, several central banks have raised rates to fight inflation in their respective countries.

The Bank of England on Thursday became the first major central bank to raise interest rates since the COVID-19 pandemic began. Norway raised rates for the second time this year on December 16 despite an expansion of COVID curbs, while Russia raised its policy rates for the seventh time this year on December 17. New Zealand had also raised its interest rate last month, and Canada has suggested that it will start doing the same soon.

Also read: Government bans futures trading in seven commodities

Higher rates in the developed markets lead to FII outflow from emerging markets as the interest rate differential reduces, making the latter less appealing for investors.

Meanwhile, China's central bank cut a benchmark lending rate on December 20, as growth has been hit by by muted consumer spending amid Beijing’s zero-tolerance policy for controlling outbreaks and tighter regulations.

At the Chinese government’s annual Central Economic Work Conference earlier this month, the country’s top leaders emphasized that stability would be a greater focus next year. FII Selling Spree

The tightening of the policies by the central banks in developed markets has resulted in unabated selling by FIIs in India and other emerging markets. In December alone, the FIIs have net sold over Rs 26,000 crore in the cash market, the highest monthly selling this year. On December 17, they net sold Rs 2,069 crore in the cash market.

Domestic investors, however, have net bought Rs 20,041 crore so far this month.