The fall was much steeper in the broader markets, with the BSE MidCap and SmallCap indices closing 1.7 per cent and 2.2 per cent lower, respectively. The overall market breadth also remained negative, with shares of 530 companies advancing against 2,223 declines.
Foreign portfolio investors (FPIs) sold shares worth a net Rs 23.26 billion, while domestic institutions purchased fresh equities to the tune of Rs 17 billion, the provisional data from stock exchanges showed.
The India VIX index rose 24.7 per cent, with the volatility gauge climbing to 20 for the first time in 15 months. The sharp spike in the index signals more turbulence ahead, in contrast to 2017, which was one of the least volatile years for equities.
The Indian markets
have closed in the red for six straight sessions, losing 5.8 per cent and wiping off investor wealth worth Rs 8.75 trillion. Market participants say a downturn in US equities, along with rising bond yields, has triggered the current correction. The S&P 500 fell 6 per cent in the last three sessions. Even Asian markets
witnessed similar selling, with markets like Hong Kong and Japan witnessing steeper falls. The current phase of correction comes after a sharp run-up in equities last year.
A correction, they say, was on the cards as valuations had soared above long-term averages.
The intensity of selling has taken pundits by surprise. Volatility is expected to continue as investors readjust risks in their portfolios after a spike in the 10-year US Treasury note.
“The current sell-off in the markets does not seem like a healthy correction. The problem with the market seems to be exceptionally high valuations, low earnings growth, and euphoric investor sentiment. A steady reduction in US long-term bond yields along with a more stable dollar would be key for the markets to stablise in the near term,” said Jonathan Garner, chief Asia & EM Equity Strategist, Morgan Stanley.
On the domestic front, a recovery in the earnings along with fiscal deficit numbers will play a key role in deciding the market direction. The Centre has set a fiscal deficit target of 3.3 per cent for 2018-19, higher than the market expectation of 3.2 per cent.
India Inc’s corporate earnings have remained muted for the past eight quarters due to several policy disruptions like the introduction of the goods and services tax (GST). However, lackluster earnings did not deter the market rally, which happened primarily on account of a liquidity gush.
“The markets could continue to remain volatile in the near to medium term as there are headwinds, such as poor earnings, climbing prices of global crude oil, and the US Fed tightening its fiscal stance. The slightly better earnings for the December quarter were more on account of a low base. Hence, the markets still seem a few quarters away from a full-fledged earnings recovery. The rally in crude oil prices could affect inflation and widen fiscal deficit,” said G Chokkalingam, founder, Equinomics Advisory.
Also, valuations in the mid- and small-cap space continue to be a cause for concern. These fears have caused the broader markets to correct more sharply than the benchmark indices. The BSE MidCap index has lost 9 per cent from its peak last week, while the BSE SmallCap is down 13 per cent from its peak.