It's been a sea of red lately as far as the Indian stock markets are concerned...The Sensex and Nifty have taken a significant hit down around 10% from their all-time highs. But why? Let's break it down.
The first reason, foreign institutional investors, or FIIs, have been selling big. In October alone, they pulled out a staggering 94,000 crore rupees from Indian markets, and the trend continues in November with another 20,000 crore rupees already gone.
So why the sudden exit? FIIs are eyeing other opportunities, especially in China. China’s new economic stimulus measures are making it an attractive destination, and FIIs are quick to chase those returns. The result? A lot less capital in India, and a lot more selling pressure on stocks.
Next up, weak corporate earnings. This season, major companies haven’t just missed expectations – some big players in the FMCG sector like Britannia and Nestle are even reporting lower demand.
For FIIs, that’s a red flag, prompting further FII selling as investors are reassessing their positions, since this is one of the sectors where valuations are among the highest. With big brokerages downgrading these stocks, volatility is climbing, and investor confidence is taking a hit.
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And now, let’s talk about inflation. India’s retail inflation has been creeping up, hitting a 14-month high of 6.21% in October. Not only is this well above the Reserve Bank of India's inflation target of 4%, it's also breached the upper end of RBI's tolerance band for inflation. This means it’s unlikely the RBI will cut interest rates anytime soon.
Global factors are also weighing on Indian markets. The U.S. dollar is getting stronger, and bond yields in the U.S. are climbing, making dollar-denominated assets more appealing compared to emerging markets like India.
And with Donald Trump about to take office, uncertainty around U.S. policies is adding another layer of risk. Investors are flocking to the safety of the dollar, leaving emerging markets.
And finally, we have profit-taking. After a long bull run, many stocks have hit high valuations, so investors are cashing in. This is especially true in high-growth sectors where prices have soared. With so much uncertainty around, locking in profits now seems like the safer bet. And as more people sell, the pressure on the market continues to build.
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