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Business News/ Markets / Stock Markets/  Liquidity withdrawal, downgrade hit stocks
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Liquidity withdrawal, downgrade hit stocks

The Sensex lost 1.89% or 1158.63 points to close at 59,984.70 points while Nifty fell 1.94% or 353.70 points to end at 17857.25 points.

Investors also appeared anxious after two foreign brokerages downgraded India, citing concerns on expensive valuations.Premium
Investors also appeared anxious after two foreign brokerages downgraded India, citing concerns on expensive valuations.

MUMBAI : Indian shares lost nearly 2% on Thursday in the biggest one-day fall since 30 April amid concerns over the recent Reserve Bank of India (RBI) move to drain cash from the banking system and a downgrade of Indian equities by Morgan Stanley.

The Sensex lost 1,158.63 points, or 1.89%, to 59,984.70, while the Nifty fell 1.94% to close at 17,857.25. Both indices saw their biggest drop since 30 April. In intraday trading, the benchmark Sensex plunged as much as 2.23% while the Nifty shed 2.26%.

Most Asian markets, too, fell on Thursday amid concerns that the recovery from the covid pandemic will slow as elevated inflation forces tighter monetary policies. Japan’s Nikkei lost 1%, while the Hang Seng in Hong Kong declined 0.3%. The expiry of monthly derivative contracts on Thursday exacerbated the losses.

Slippery slope
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Slippery slope

RBI on Wednesday said it will conduct seven-day and 28-day variable rate reverse repo (VRRR) auctions worth 1.5 trillion and 50,000 crore, respectively, on 2 November. The deployment of longer-term operations of 28 days will be the first since RBI governor Shaktikanta Das flagged the move in the 8 October policy.

"This move reinforces the central bank’s discomfort with excess liquidity and shift in strategy to address the surfeit in a more durable basis through longer-tenor VRRR auctions. Money market rates as well as the 3M treasury bill yields have been drifting up in recent weeks, owing to the ongoing liquidity management measures. Looking ahead, the VRRR tenor increase marks another incremental step towards an eventual hike in the reverse repo rate, which we suspect will happen in two tranches and start as early as the December meeting," said Radhika Rao, an economist at DBS Bank.

The move highlights the RBI’s worries over excess cash in banks, which stands at more than 7.5 trillion and may increase inflation. The longer-term reverse repo may also be aimed at managing a potential gush of liquidity on account of a slate of initial share sales in the coming weeks.

Nykaa owner FSN E-Commerce Ventures aims to raise 5,320 crore, while Paytm plans to raise 18,300 crore via their initial share sale early next month.

Investors also appeared anxious after Morgan Stanley and Nomura downgraded India, citing expensive valuations.

Morgan Stanley downgraded Indian stocks to equal weight.

“The fundamental leading indicators are positive; we see valuations as increasingly constraining returns over the next 3-6 months, particularly as we head towards Fed tapering, absorbing the impact of higher energy costs and our expectations of a first RBI hike for the cycle in February 2022," a Morgan Stanley report said.

“Notwithstanding the already sharply upgraded consensus earnings through 2021, India’s 12-month forward P/E ratio has moved to an all-time high of 24.1x. As a result, India is the most expensive market in our model on EM-relative 5-year trailing Z-score of P/B and P/E. We believe this might see the index take a breather from here and look for some consolidation, with our India strategy team preferring consumer discretionary and financials while avoiding technology and healthcare," it added.

On 25 October, Nomura downgraded Indian markets to neutral from overweight, citing unfavourable risk-reward given high valuations, as several positives appeared to be priced in even as headwinds are emerging.

Instead, the Japanese brokerage firm prefers China and Asean and will be looking for better entry points for India.

On 20 October, UBS said that it has an underweight rating on India, calling it “extremely expensive".

Strategists at UBS find Indian equities to be the least attractive as valuations are rising with fading earnings momentum while there is less scope for an economic rebound this year.

“This fall in the index has derailed the recent recovery, and we may see a further slide in the following sessions. We reiterate our cautious view on markets and suggest restricting leveraged positions," said Ajit Mishra, vice-president of research at Religare Broking.

Foreign institutional investors have sold Indian equities worth $1.47 billion in the last five sessions. Cumulatively, so far this month, FIIs are net sellers of equities worth $970.82 million.

Bloomberg contributed this story.

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Published: 28 Oct 2021, 06:40 PM IST
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