Sensex plunges over 1,800 points in 3 days; what’s pulling the market down?

Indian equity benchmarks flashed red yet again on January 20, with BSE Sensex tanking more than 1,800 points in the three-day losing spree.

The Sensex ended the day down 634.2 points, or 1.1 percent, at 59,464.6, while the Nifty closed 181.4 points, or 1.0 percent, lower at 17,757.

The indices saw sharp cuts despite Asian equity markets rising led by China. Asian shares were trading largely higher after media reports said Chinese authorities are likely to ease curbs on how real estate developers use their funds in escrow accounts, which could ease the pain in the country’s crumbling real estate sector.

Indian markets, however, were an island of red even as US stock futures pointed to a strong start later in the day after the recent correction.

"Persistent concern over global inflation and a likely Fed rate hike acted as the major headwinds for the domestic market to tumble for the third consecutive day," said Vinod Nair, head of research at Geojit Financial Services.

Here are the factors that led to losses in the Indian market:

1 Surging bond yields

The sharp surge in global government bond yields led by the US treasury bonds this week has brought a reckoning for investors, who had gotten used to abundant liquidity driving share prices higher.

The rise in bond yields has forced investors to recalibrate their optimism for growth and shift funds towards less risky assets, said dealers.

The rise in bond yields has come as the US Federal Reserve is expected to raise interest rates three times in 2022, with the first expected in March.

2 FPI selling

The surge in global bond yields and a spike in volatility forced foreign portfolio investors (FPIs) to trim their exposure to richly priced markets such as India.

After a brief pause in the first week of January, foreign investors resumed their selling activity. FPIs have been net sellers of Indian shares for five previous sessions and dealers expect the same on January 20.

3 Omicron threat

While the daily coronavirus caseload in cities such as Mumbai and Delhi is showing a slight dip, nationally, the the count continues to be high.

The country reported more than 300,000 cases, its highest tally since May 2021, in the last 24 hours, health ministry’s update at 9am on January 20 showed.

The rise in cases suggests that restrictions imposed by state governments are likely to continue for some time and may hamper economic activity in the near term.

4 Patchy earnings

With the December quarter earnings season in full swing, investors have not had much to cheer for except the odd breakthrough performance.

According to analysts, most companies that have reported their earnings have either met expectations or missed them with a few surpassing estimates by a substantial mark.

If the trend continues, brokerages may be forced to trim their earnings expectations for the new financial year.