Panic selling in global markets on growing fears of coronavirus dragged Indian stock markets down on Monday. Analysts said that domestic investors are turning cautious given the selling pressure in global markets and the big event risk of the budget announcement on 1 February.
The BSE Sensex ended at 41,155.12, down 458.07 points or 1.10%, while the Nifty was at 12,119, down 129.25 points or 1.06%.
In other parts of Asia, Japan was down 2% on Monday as investors were wary about the fast-spreading coronavirus, which was first reported from the Chinese city of Wuhan. Markets in Australia, China, Hong Kong, Singapore, South Korea, and Taiwan are closed for public holidays.
“The Indian stock markets have reacted negatively because of a combination of factors such as the outbreak of coronavirus impacting the world financial markets and apprehensions around the Union budget announcements. Investors are apprehensive about institutional reaction if the budget is not favourable for equities," said Deepak Jasani, head of retail research at HDFC Securities Ltd.
Jasani, however, thinks that the budget is just a temporary event and, once it passes, market participants will focus on other critical issues such as corporate earnings growth.
Investors are waiting for the budget with high hopes for a growth stimulus by the government even as concerns about fiscal slippage has left them worried. If the budget fails to be the growth catalyst that everyone is hoping for, investors may turn bearish on Indian stocks, market experts said.
The Union budget is likely to be overall positive for the markets, according to analysts at BofA Securities, though they think slow revenue growth means resources are particularly constrained now. “In the whole budgeting exercise, the last is a choice we think the Govt. could realistically make. Some form of tax relief seems likely. The market, which tends to be short termist, may end up liking announcements on 1 February. While the budget could create an overall positive tone, we see few sustainable themes," it said in a note on 23 January.
Meanwhile, global concerns about the fatal virus in China supported buying in other assets such as gold, considered a safe haven, while Brent crude prices declined on worries that the virus outbreak in China may dent fuel demand.
On Monday, Brent crude fell below $60 per barrel for the first time since 22 October 2019, while gold prices have been above $1,500 per ounce for about a month now.
“The increased spread of coronavirus in China has led to a shift from riskier assets to safe havens. The biggest factor in focus at present is the virus outbreak in China, which threatens to have a widespread impact on the Chinese and global economy. We have already seen a shift from riskier assets to safe-haven assets but market nerves may remain frayed unless there are signs that virus can be contained soon. However, increasing risks to the Chinese economy also threatens to affect consumer demand for gold hence the upside movement may be limited," said Ravindra Rao, vice-president and head, commodity research, at Kotak Securities Ltd.
Rao feels that riskier assets such as crude oil and base metals may go down further but any positive news of the containment of the coronavirus virus can trigger sharp short covering in riskier assets.
The Indian rupee on Monday hit a near three-week low against the US dollar amid subdued global equities. Risk appetite was hit after China reported an increase in fatalities and infections from the coronavirus. The rupee closed at 71.44 a dollar, down 0.15% from Friday’s close of 71.33.
The rupee opened at 71.50 and touched a low of 71.51 on Monday, a level last seen on 8 January.
“Lower oil prices have offset month-end dollar demand which has kept USD-INR in a tight range. A major development on the China coronavirus can be a spoilsport. Overall for next week, USD-INR is expected to trade in a range which crucial supports placed at 71.05 and 71.60," said Rahul Gupta, head of research, currency, Emkay Global Financial Services.