NEW DELHI: Just when the stock market rally was looking bulletproof after seven consecutive weekly gains that took Sensex and Nifty to never-seen-before levels, bulls were in for a shock on Wednesday afternoon as the market plunged abruptly leading to a Rs 9 lakh crore loss in market capitalisation.
Most participants were left scratching their heads to understand what went wrong suddenly when none of the major global or domestic cues were blinking red on their terminals.
In one of the worst days in the market in 2023, Nifty ended 1.4% lower, while Sensex ended 931 points weaker. Mid and smallcaps were left bleeding as the Nifty Midcap100 registered its biggest single-session decline in almost a year. The PSU bank index fell 4% to record single biggest session decline in over a year.
Market data showed that FIIs were net sellers to the tune of Rs 1,322 crore but DIIs made up for the loss with net buying of Rs 4,754 crore.
Here are 6 factors that could be behind today's Sensex, Nifty fall:
1) Profit booking
Riding high on the back of consistent FII inflows, the Nifty has been rallying incessantly for the last seven weeks. November month's 5.5% upside was the highest monthly gain for the index since July 2022.
After such a sharp rise in a short period, some amount of profit booking and consolidative move was warranted.
A study of December month's performance in the last five years shows that positive run-ups during the lead period have had corrections or consolidations in the subsequent fortnight, while declines during the lead-up were followed by upswings especially so in the last five years.
2) Rising Covid-19 cases
Not that Covid-19 has become a major public health issue once again, but the recent rise in the Covid sub-variant JN.1 cases in India has raised concerns among some investors.
Kerala reported 292 new active cases of COVID-19 and 3 deaths yesterday. Earlier in the day, Union Health Minister Mansukh Mandaviya reviewed the preparedness of health facilities and stressed being alert against emerging strains of coronavirus. However, the pharma index also fell 1.65%.
3) Red Sea tensions
Investors are tracking global trade disruption and geopolitical tensions in the Middle East following attacks on ships by Yemen's Iran-aligned Houthi forces in the Red Sea.
On Wednesday, Greece advised commercial vessels sailing in the Red Sea and the Gulf of Aden to avoid Yemeni waters. Greek ship owners control about 20% of the world's commercial vessels in terms of carrying capacity.
About 12% of world shipping traffic passes up the Red Sea and through the Suez Canal. Although oil supply has been re-aligned, no shortages have yet emerged, analysts said.
Brent crude oil prices rose over 1% to around $80 a barrel.
4) Smallcap bubble
While Kotak Equities had called the broader market rally as "madcap rally" way back in early September, the chorus of a bubble building in the broader market is growing louder with each passing day.
"There are hardly any margins of safety left in some pockets of mid- and small-caps after a significant run-up, thus taking out some froth is healthy for the market," said Sanjeev Hota, Head of Research, Sharekhan by BNP Paribas.
5) IPO rush
Unlike typical December months, this winter is a IPO-heavy one with 11 mainboard and several other SME IPOs jostling for attention in last month of 2023. Analysts say the buoyant primary market may have set the stage for a correction. "Tight liquidity among HNIs due to their involvement in IPOs could have contributed to the selling pressure," said Parth Nyati, founder of Tradingo.
6) AIF factor
The Reserve Bank of India (RBI) had yesterday tightened the norms for banks and NBFCs from utilising the alternative investment fund (AIF) route to 'evergreen' their loans.
“If an AIF scheme, in which regulated entity (bank or NBFC) is already an investor, makes a downstream investment in any such debtor company, then the regulated entity shall liquidate its investment in the scheme within 30 days from the date of such downstream investment by the AIF,” RBI had said.
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