Mumbai: Despite positive optimism riding high on the Modi wave which took equity markets to fresh highs on Thursday, the rally fizzled out by last few hours of trade as investors shifted focus to other challenges staring at the markets such as earnings downgrade and economic slowdown. The benchmark indices Sensex hit 40,000, while the Nifty touched 12,000 for the first time ever as trends showed Prime Minister Narendra Modi’s Bharatiya Janta Party (BJP) all set to win the Lok Sabha election, counting of which was still underway at the time of filing the story.
The Sensex closed at 11,657.05, down 80.85 points, or 0.69%, while the Nifty ended at 38,811.39, down 298.82 points, or 0.76%. Both the Sensex and the Nifty posted their biggest intra-day falls in 11 years. The Sensex slipped 1,313.57 points, while the Nifty fell 384.1 points from their record highs.
Global markets were weak due to trade concerns in China and political uncertainty across the European Union. Markets in China, Hong Kong, Japan, Germany, UK and France were down by over 1%.
Analysts said the markets could not sustain high levels for long as Modi’s win in the general election was already largely priced in. Kamlesh Rao, MD and CEO, Kotak Securities said external factors such as global geo-political tension and domestic economic slowdown were very precarious for the markets at the moment. “The biggest benefit the election verdict is that stability and resolution of this market would be far better now. Also, the possibilities of the input parameters that are required for fundamentally driving the markets from here are in place. Challenges in the markets are far higher than a political stability. Having said that, would have been in a bigger disaster if the stability was not there," he added.
The markets had started climbing from late Wednesday as investors priced in a comeback for the incumbent party. The Sensex gained over 5% from last Wednesday to date after a fall of nearly 5% in the first 15 days of this month.
Raamdeo Agrawal, co-founder, Motilal Oswal Financial Services said, “The new government must harness the power of the stock market to fund developmental needs. The government can get few lakh crores of resources by better management of PSUs and their judicious divestment. Further, it must focus on increasing the smooth flow of capital to entrepreneurs. In my view, aversion to lend is becoming a bigger problem than availability of liquidity and cost of funds. The new government will have to work closely with the RBI and other capital market participants to resolve this crisis on a war-footing."
According to analysts, markets are set for consolidation going ahead. However, volatility would remain high in the near future. The National Stock Exchange’s (NSE’s) India VIX index, which tracks investors’ perception of volatility for at least a month ahead, slipped 29.14% on Thursday, its steepest fall since 16 May 2014. The volatility index typically has an inverse correlation with the market. The index at low level is an indication that investors do not expect a major correction at least over the next month.
"Since the final outcome is in-line with expectation, we can have a mild consolidation in the short-term. This is because neither the earnings nor the economy have started to pick up and unlikely to revamp immediately as it takes 1 to 2 quarters before stabilising. These factors along with premium valuation and muted global trend will start to control the momentum of the market as optimism gets digested," according to Vinod Nair, research head, Geojit Financial Services.
"The results will reinforce the conviction of the investor community in India’s reforms and growth. After the initial euphoria, markets may see some profit-taking and remain somewhat volatile until we have clarity on who will hold key portfolios in the new ministry. Financial markets will turn focus soon to the RBI MPC in early June as measures for improving liquidity in the system and addressing issues relating to weak growth in a low inflationary environment are anticipated," according R.K. Gurumurthy, head, treasury, Lakshmi Vilas Bank.
"Key concerns are how the fiscal deficit will pan out. Against a backdrop of tepid, trade-war ridden global economic growth scenario, it remains to be seen how we will move out of the 7-8% range into a higher platform. The strong majority arising from the poll-verdict would pave way for the second round of reforms and economy would, therefore, benefit immensely," Gurumurthy added.