Markets tank on fund outflows, RBI caution, weak Q1 earnings

Stocks continued to be under selling pressure because of funds outflow from Indian equities, macroeconomic concerns, slow monsoon progress, and weak corporate earnings.

Benchmark indices closed nearly 1% lower on Monday. The Sensex closed at 38,031.13, down 305.88 points or 0.8%, while the 50-share Nifty was at 11,346.20, down 73.05 points or 0.64%.

Global volatility, along with weak corporate results so far, has been weighing on the markets, according to Gaurav Dua, senior vice-president and head, capital market strategy, Sharekhan by BNP Paribas. “The Reserve Bank of India’s (RBI) governor’s commentary indicating a measured pace of rate cuts also adversely impacted both bond and the equity markets,” said Dua.

Weakness in the markets will continue in the immediate term in absence of any upside triggers.

The aggressive sell-off started after finance minister Nirmala Sitharaman proposed higher tax surcharge on “super rich” category of tax payers expected to hurt foreign portfolio investment. From budget till now, Sensex is down over 5% while it has still gained 5% year to date. Sensex has lost nearly 6% from its record high levels touched on 4 June, riding high on Narendra Modi’s second term as Prime Minister.

However, foreign liquidity, which had been keeping the markets buoyant so far in absence of domestic money, has seen a sharp sell-off in July reacting to new tax proposals in Budget. In July FIIs sold $1.04 billion, its steepest fall since October 2018 when they sold Indian equities worth $3.75 billion. However, domestic institutional investors (DIIs) including mutual funds and insurance companies were net buyers of ₹6,572.47 crore in July alone, highest in nine months.

Kotak Institutional Equities feels that the government’s decision to raise taxes on automobile fuels, gold and high-income households in the FY20 Union budget may have certain unintended macroeconomic consequences and may prolong the ongoing economic slowdown. The government raised taxes on several items to contain the fiscal deficit at a manageable level given the 22% increase in revenue expenditure in FY20 and continued disappointment in goods and services tax (GST) revenues.

“The government’s decision to raise excise duty on diesel and gasoline by ₹2 per litre in the FY20 union budget will result in ₹28,000 crore of additional revenues for the government… The government’s decision to raise customs duty on gold to 12.5% from 10% will result in additional ₹4,000-5000 crore of revenue. However, it will increase the domestic price of gold by 2.5% and revalue the entire stock of gold with Indian households by the same amount,” it said in a note on 19 July.

Rajiv Singh, chief executive of Karvy Stock Broking Ltd, said the stock market’ weakness post budget is caused by selling by FIIs in the index heavyweights besides weak global cues. “The markets have also started factoring in weak corporate results, slow progress of monsoon, lack of any stimulus package from government to spur consumption slowdown and no concrete steps being taken by the government to address liquidity crunch. This is besides the possibility of trade war causing global slowdown and money moving towards precious metals like gold,” Singh said.

Emerging markets fell on Monday as expectations dwindled for an aggressive interest-rate cut by the US Federal Reserve, while the introduction in China of a Nasdaq-styled index pulled investment away from existing indices. Major Asian markets have closed on a negative note, barring the Taiwan index.

“Monday’s trade has given first indications of a near term turnaround in the trend of the markets to up. The strong bluechip stocks participated in the fall on Monday indicating end of the current downtrend at least temporarily,” said Deepak Jasani, head of retail research, HDFC Securities Ltd.

The government’s report card after completing 50 days in office failed to enthuse investors. Presenting a report card after completing 50 days in office, the government on Monday said it is already “walking the talk” on its promise of fast-paced development with “speed, skill and scale” being manifested in the Modi dispensation’s second term.