In February, Sensex posts worst loss in two years
Mumbai: Indian benchmark equity indices shed about 5% in February, logging their worst monthly loss in two years as a combination of a long-term capital gains tax re-introduced in the Union Budget and volatility in world markets upset investors.
A more hawkish US Federal Reserve could keep stocks in check despite a sentiment boost from higher economic growth, said experts.
The 30-share BSE Sensex dropped 4.95% or 1,780.98 points in February to close at 34,184.04 points. The National Stock Exchange’s (NSE) 50-share Nifty shed 4.85% or 534.85 points and closed the month at 10,492.85 points. In percentage terms, this is the biggest monthly decline for both the indices since February 2016.
The month started on a jittery note as investors gave a thumbs down to the government’s reintroduction of long-term capital gains (LTCG) tax in the Union Budget presented on 1 February. Thereafter, volatility reigned supreme in global markets as investors were concerned about the rise in US treasury yields and leveraged bets against stock volatility were unwinding.
“A 5% correction is not abnormal as we never had any correction for a long time. I would not read too much into that,” said Hemang Jani, senior vice-president and head of advisory at Sharekhan by BNP Paribas. “However, fears of rising interest rates, macro data points turning negative, and the Punjab National Bank scam shook the confidence of investors.”
On 14 February, Punjab National Bank said that it had discovered a fraud of Rs11,400 crore, later revised to Rs12,636 crore.
Meanwhile, India’s trade deficit shot up to a 56-month high of $16.3 billion in January as imports of precious stones and crude oil surged during the month while growth in exports slowed down, data released earlier in February showed.
Foreign institutional investors (FIIs) sold a net of $1.6 billion of Indian shares since the start of the month to 26 February, and they may have shown the least interest since August. On the other hand, domestic institutional investors (DIIs) invested a net of Rs17,813 crore during the month, their best inflows since September.
All may not be well just as yet though.
“We are still integrated at the global level,” said Ritesh Jain, chief investment officer at BNP Paribas Mutual Fund, adding that had it not been for support from local investors, the fall would have been sharper.
“Global brokerages are reducing their India overweight so it depends on how domestic investors manage to invest in days to come, as FIIs are not coming back anytime soon with great interest,” said Jain. “Having said that, GDP data is really positive. If this is the case, corporate profitability looks good over next 2-3 quarters.”
India’s GDP growth came in at 7.2% in the December quarter, data from the Central Statistics Office showed on Wednesday. The Indian economy grew at 6.3% in the September quarter after it fell to a three-year low of 5.7% in the June quarter. The consistent growth indicates that the economy has moved on from the twin policy shocks of demonetisation in November 2016 and roll out of goods and services tax on 1 July, 2017.
However, that might not be enough, say analysts.
“We will have to wait and see how some of the global and domestic macro factors are behaving and where they settle down. As of now, there is some flux,” said Sanjeev Prasad, managing director and co-head of Kotak Institutional Equities
Prasad said that global bond yields are expected to firm up, but the extent is not known and this will dictate the quantum and pace of tightening by the central banks of developed markets.
On Tuesday, US Federal Reserve chief Jerome Powell’s comments suggested the possibility of four interest rate increases this year rather than three.
“GST revenues may run short of the required run-rate in FY19. That raises questions on government’s borrowing programme and bond yields. It is uncertain how crude oil will fare in near term,” said Prasad. “So, for now, it is wait and watch for the Indian market.”
Reuters contributed to thisstory.
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