Market correction leaves investors poorer by Rs 8 lakh crore in 4 days. What’s driving D-Street down?

The notional wealth of equity investors has suffered an over Rs 8-lakh-crore dent across four straight sessions with the benchmark equity indices down nearly 4 percent.

“The US markets are down for the fifth consecutive day with tech-heavy NASDAQ leading the fall. The tremors of this fall are being felt in the tech sector in India too with IT underperforming hugely,” VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said in a note.

At 10:31am, the Nifty50 index was down 136 points, or 0.8 percent, to 17,621.1, while the BSE-Sensex was at 58,969.1, down 495.7 points, or 0.8 percent. In the broader market, the Nifty Midcap 100 and Nifty Smallcap 100 indices fell 0.8 percent and 0.6 percent, respectively.

Let’s take a look at the major forces behind the ongoing correction.

1. Global Markets

The losses in the Indian markets are mirroring the fall in the US equity markets, which have fallen for five consecutive sessions till Thursday. The surge in global bond yields in anticipation of a hike in interest rates by the US Federal Reserve has made investors risk averse and forced them to reshuffle their portfolios towards less-risky assets. The risk aversion is reflected in the gains in assets like gold and currencies like the Swiss franc.

2. Financial Tightening

Not only in the US, financial conditions are tightening at home too as the Reserve Bank of India continues on its path of gradual liquidity normalisation. The call money rate, the rate at which banks borrow overnight, surged to a day’s high of 4.55 percent from an average of nearly 3.25-3.50 percent last month. The surge in the call rate was also accompanied by a rise in tri-party repo dealing and settlement to 4.24 today from around 3.5 percent at the end of December.

3. FPI Selling

The selling spree in foreign portfolio investors continues unabated as they reshuffle their portfolios to move out of richly priced markets amid tightening global bond yields and move into attractively valued markets in Japan and Europe. Overall, foreign investors have now sold equities worth more than Rs 1 lakh crore from the beginning of October.

4. Margin, Demand Headwinds

Earnings of Indian companies for the quarter ended December has so far indicated that pressure on their operating margins continues to remain high and is impacting their profitability. Initial commentary from companies like Hindustan Unilever has also pointed to a stress in the rural economy, while Bajaj Finance earlier this month suggested that low-income consumers in urban areas also remain affected by the pandemic.

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