Indian shares dropped to their lowest level in over three months Tuesday as investors lost confidence due to a widespread sell-off sparked by weak corporate profits, concerns about global trade and continued outflows of foreign funds.
The BSE Sensex fell 1.28% and closed at 82180.47. Both were their lowest closing levels for over three months.
India VIX jumped nearly 8% during the sell-off, indicating that the market will continue to be volatile in the short term.
Large and small cap stocks both hit by broad-based selling
It was not just the frontline indexes that were affected.
The selling was concentrated in the larger markets, as small and midcap indexes fell 2.9% and 2,6% respectively.
Small-caps closed at their lowest levels in 8 months while mid-caps fell to a 3-month low. This reflects a growing risk-aversion on the part of investors.
The market breadth has turned a decisive negative with 16 of the major sectoral indexes finishing in red.
The Nifty 500 closed higher on 28 out of the total 500 stocks, highlighting the severity of the selling.
Dharmesh KANT, the head of equity analysis at Chola Securities said that “Valuations have been reset”.
While a few firms stood out, he noted that most of the Nifty50 companies reporting earnings for December quarter fell short of their expectations.
Indexes are lower due to heavyweight IT stocks and other companies.
The IT sector, which fell 2.1% and became the worst performing sector on the day, led the way in the loss of stocks.
According to analysts, margins in the industry have been impacted by the new labor codes and the resulting impact on profitability.
LTIMindtree fell 6.7% following a quarterly profit decline, and Wipro dropped 2.5%. Both companies extended losses from previous sessions due to a weak outlook for the fourth quarter.
The benchmarks were also affected by heavyweight stocks.
Reliance Industries fell 1.4% on Monday, continuing the decline that began after it reported third-quarter results below expectations.
ICICI Bank is another major index bank that disappointed investors by delivering results below expectations.
Budget adds to the jitters; global trade concerns and overseas sales deepen the gloom
The mood remained fragile amid the global uncertainty, especially after US President Donald Trump announced additional tariffs against eight European Union member countries, reigniting fears of an expanded trade conflict.
The pressure on the domestic market was increased by continued sales of foreign institutional investors.
Investors from overseas have already sold Indian stocks worth $3 billion in the first month of January. This is the largest monthly outflow since August.
In nine out of 13 sessions, the Nifty 50 ended with a lower price.
The market participants also remain cautious in anticipation of the Federal Budget on February 1. They expect the government to announce new measures that will boost consumer demand, economic growth and job creation.
Investors are uneasy about the prospect of a tightening fiscal consolidation that could reduce capital spending.
Aamar Singh, Senior Vice President at Angel One said that investors were on edge due to the continued selling of foreign investments and the lack of any rally in advance of the Union Budget.
Analysts assess the technical level of near term volatility
According to analysts, volatility is expected to persist in the short-term.
The volatility of the market will likely continue until there is some clarification regarding the US/European standoff over Greenland tariffs. The uncertainty is likely to continue as both sides are hardening their positions. VK Vijayakumar said, “Both sides have hardened the position, so it will take some time.”
The near-term prospects remain weak, according to technical analysts.
Sudeep Shah is the head of technical research and derivatives at SBI Securities. He says that the 25370-25400 area now represents a key resistance zone for the Nifty.
Shah stated that “as long as this index remains below 25,400 the broader sentiment will likely remain weak.”
In the short-term, if the index fails to maintain its support level of 25,080, it could be pushed towards 24,900.
Rupak De is a senior analyst with LKP. He said that the bears have regained their control in light of ongoing tensions on transatlantic trade.
The indicators are still in a bearish zone and nearing the oversold level. They have also drifted towards their 200-day moving index.
If the current level is maintained, a pullback in price could occur.
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