Sensex, Nifty drop 1%; here are 4 factors behind the fall

Tracking weak global cues, the Indian equity market benchmarks the Sensex and the Nifty50 fell over a percent each on July 19.

The 30-share pack Sensex fell 734 points while Nifty plunged to 15,707.50 in intraday trade as investors fretted about rising inflation and incessant global spread of Delta variant of coronavirus.

At close, Sensex was 587 points, or 1.10 percent, down at 52,553.40 while the Nifty settled 171 points, or 1.07 percent, lower at 15,752.40.

Midcaps and smallcaps fared relatively better than their larger peers as the BSE Midcap index closed 0.58 percent lower while the smallcap index fell 0.31 percent.

1. Weak Asian cues: Indian market fell in sync with major Asian peers who were under pressure as investors avoided riskier equities and bought safe-haven assets such as gold amid concerns of rising inflation and a continuous surge in coronavirus cases.

Japan's Nikkei, Hong Kong's Hang Seng and Korea's KOSPI fell over a percent each.

2. Banking, financial stocks drag: Poor show of banking and financial heavyweights, such as HDFC twins, IndusInd Bank, ICICI Bank, Kotak Mahindra Bank, Axis Bank and SBI, pushed the equity benchmarks lower.

Banking and financial stocks came under fresh pressure after the June-quarter numbers of HDFC Bank failed to meet market expectations.

The bank on July 17 reported a 16.1 percent year-on-year growth in standalone profit at Rs 7,729.64 crore for the quarter ended June 2021 which was below market expectations as a CNBC-TV18 poll had estimated the numbers to the tune of Rs 7,995.9 crore.

Net interest income (NII), the difference between interest earned and interest expended, grew by 8.6 percent to Rs 17,009 crore but was below the CNBC-TV18 poll of Rs 17,698 crore.

As per CNBC-TV18, HDFC Bank's net interest margin came in at 4.1 percent, an 18-quarter low.

The bank's gross non-performing assets were at 1.47 percent of gross advances in Q1FY22, against 1.32 percent in Q4FY21, and net non-performing assets were at 0.48 percent against 0.40 percent.

Experts point out that the market appears to be disappointed with HDFC Bank's number and the effect is spilling over other financial stocks too.

3. Relentless selling of FPIs: Foreign portfolio investors (FPIs) have been selling equities in July. As per data available with NSDL, FPIs have sold Indian equities worth Rs 4,515 crore in July so far. They have invested some money in the debt segment so net-net, they have pulled out Rs 1,517 crore from the Indian financial market in July so far.

4. Concerns over rich valuation: The market is trading near record-high levels which has raised concerns about rich valuations.

"Markets are likely to swing between 'risk on' & 'risk off' modes in the very short-term. Excessive valuations will persuade FIIs to sell consistently at higher levels," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

"The best safeguard in these uncertain times is to stick to high quality. Without a doubt, there is froth in the market. Froth getting removed is only a matter of time," said Vijayakumar.

However, the risk of a sharp correction is feeble as retail investors continue with their buy on dips strategy whenever the market declines.

The market opened a gap down, but the index still managed to stay above 15,700.

"The support is now upgraded from 15,400 to 15,600. As long as we do not break this on a closing basis, intraday dips or corrections can be utilised to accumulate long positions for a target of 16,000-16,100," said Manish Hathiramani, Proprietary Index Trader and Technical Analyst, Deen Dayal Investments.

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