Why Sensex and Nifty tanked almost 6% in six trading days

Demonetisation, Donald Trump's surprise victory in the US presidential elections, and the fear that US Fed may hike rates in the upcoming policy review in December have dented market sentiments, report Puneet Wadhwa & Deepak Korgaonkar.

Foreign Institutional Investors (FIIs) and foreign portfolio investors (FPIs) have sold equity shares worth over $1 billion in the past six trading days after the government demonetised Rs 500 and Rs 1000 currency notes.

The surprise victory of Donald Trump in the US presidential elections, and the latest economic (housing and jobless claims) data from the US that could push the US Federal Reserve (US Fed) to hike rates in the upcoming policy review in December also dented sentiment.

As per data from the National Securities Depository Ltd (NSDL), since November 9, FIIs and FPIs have been net sellers at $ 1.4 billion (Rs 9,340 crore) till Thursday.

As per provisional stock exchange data, FIIs sold an additional shares worth of Rs 926 crore on Friday, taking their total net outflow of Rs 10,266 crore (nearly $ 1.5 billion) in the past seven trading sessions.

The huge selling by overseas investors has dragged the benchmark S&P BSE Sensex and Nifty50 stock indices down nearly 6% each during the same period.

"The withdrawal from the Indian markets has largely been triggered by the emerging market (EM) versus developed market trade post the outcome of the US Presidential election. That apart, the big worry and an unknown factor is how the US Fed will react to the situation in its December policy review is adding to the nervousness," said Vinay Khattar, associate director and head of research at Edelweiss.

Even though overseas investors were net sellers in past two months and first two months of the calendar year 2016, they were net buyers worth of Rs 37,145 crore ($5.6 billion) in current year. In the first two months -- January (Rs 11,126 crore or $1.6 billion) and in February (Rs 5,521 crore or $809 million) -- they sold equities worth $2.5 billion.

The road ahead

So, what is the road ahead for fund flows, and how long will this negative sentiment last?

Analysts say, going ahead, both FII and the domestic flows (DII) will be important for the market direction. Trump assuming office, a rate hike by the US Fed and the impact of demonetisation on the economy, and in turn corporate earnings, will be the key factors that will decide how the markets pan out.

"Across equity and debt, the withdrawal has been to the tune of $2.8 billion thus far in November. It is a question how where the global interest rates are headed, an in this backdrop, emerging markets are being viewed as a risk - off region. We are likely to see capital outflows across all EMs. India has an additional negative of demonetisation playing out as well in the short-term, though the long-term story still remains intact," says Tirthankar Patnaik, India Strategist at Japan-based Mizuho Bank.

"Given the government's move, we expect the GDP growth to slip 50-60 basis points (bps) in FY17, and by a similar quantum in FY18. We expected corporate earnings growth (Nifty) to be around 12-13 per cent in FY17, but this will now drop to 8-9 per cent.

"If the rural economy is spared an economic shock, we may not see very bad corporate earnings numbers over the next few quarters. I don't rule out the possibility of the Nifty50 index hitting 7,500 levels over the next three months," he adds.

U R Bhat, managing director, Dalton Capital Advisors, too, believes that at the global level there will be a lot of uncertainty till Trump's presidency starts. Investors will continue to withdraw money from the riskier assets, including EMs. As regards demonetisation, he believes the impact will start to become clear as economic data gets rolled out.

"Markets are keenly watching who Donald Trump appoints to key posts. All the campaign and rhetoric may not get translated into policy action. Markets will remain choppy till then," he adds.

Photograph: Danish Siddiqui/Reuters