Why the Sensex cracked 2,272 points in 4 days flat?

24 Jan 2022 , 10:26 AM

The week starting on 17-Jan began strong but then the markets just dipped vertically after that. There was no real spike in VIX or any such scary indicators. The indices just dipped on the back of selling in heavyweights. The Sensex fell a full 2,272 points in 4 days flat, which is an average fall of 568 points per day. The surprising part is, the markets fell around these levels on all the four days.

Data Source: BSE

The sea of red clearly shows an index under tremendous pressure. What exactly has changed after the optimism of the last couple of weeks. Why did the Sensex and Nifty suddenly cave in during the week?

Let us first look at the good news. In the last 3 weeks since 28-Dec, the Fed has consistently been infusing funds by buying bonds. In the last 3 weeks, the Fed has net-purchased bonds worth $110.4 billion taking the Fed balance sheet to a record level of $8.868 trillion. Clearly, global liquidity is not the issue and the fall in the Sensex this week has more to do with India specific factors. Here are five factors that led the Sensex lower this week.

1. Q3 results have taken a toll on markets

To be fair, the results are not bad. Big names like TCS, Bajaj Auto, Bajaj Finance, Hindustan Unilever and Reliance Industries showed growth in bottom line. However, the big area of concern is the pressure on operating margins. IT companies have taken a hit on operating margins on account of higher manpower and outsourcing costs. Companies in the auto, FMCG and paints segment saw a sharp spike in input costs. Overall operating margins are under pressure and that has kept the markets under pressure.

2. FPI selling has been aggressive during the week

The table below captures the net FPI investment each day of the current week.

Date	Equity Flows – Secondary	Equity Flows – IPOs	Total FPI Flows
17-Jan-2022	(2,575.91)	1.26	(2,574.65)
18-Jan-2022	(243.60)	0.00	(243.60)
19-Jan-2022	(596.45)	(0.24)	(596.69)
20-Jan-2022	(2,634.67)	(3.82)	(2,638.49)
21-Jan-2022	(4,569.65)	(24.83)	(4,594.48)

Data Source: NSDL (All values in Rs. Crore and negative values in brackets)

In the five days of the week, FPIs sold equities to the tune of Rs10,648cr. For the month of Jan-22, FPIs net sold equities worth Rs.8,791cr, underlining that bulk of the selling by FPIs happened during the recent week. How do we interpret this data in conjunction with the Fed expanding its balance sheet. Most of the EM targeted liquidity in Asia has been flowing into markets like South Korea, Taiwan and Indonesia at the cost of India flows. That is what led to such strong downward pressure on markets during the week.

3. Global inflation and global hawkishness is spooking Indian markets

The US inflation touched 7% in Dec-21, the highest level since 1982. The US Fed has already indicated that rate hikes could start immediately after the taper is completed in March 2022. Goldman Sachs has warned that the Fed could undertake 4 rate hikes instead of 3 this year and it could be as high as 125 bps overall. Meanwhile, the UK is planning its second rate hike. All these factors are expected to put pressure on the RBI to also raise rates.

In fact, the RBI has a dual problem on hand. If they do not raise rates, there is the risk of capital outflows from Indian debt. However, if it raises the rates, then the RBI will have to borrow for the government at much higher bond yields. Already, most of the bond issues are devolving as there are no takers even for the current offering.

4. Markets are pencilling in a populist budget 2022-23

With about 2 years to go for the next general election and a slew of big state elections slated this year in Uttar Pradesh, Punjab and Gujarat, the government is likely to give a populist tilt to this year’s budget. It will also be welcomed by the people at large, especially after 2 years of COVID related stress for the Indian population. However, this will come at a higher fiscal cost.

Markets would have been extremely happy to see the government drawing up a timetable for tapering the fiscal deficit. However, with weak disinvestment revenues, most of these sops would mean more borrowings and a higher fiscal deficit. That is not making the foreign investors too comfortable with the idea of investing in Indian markets.

5. Markets are worried about the relentless rally in crude oil

Brent Crude recently touched the highest level in 7 years when it crossed $87/bbl. That is not great news as India relies on imports of crude for nearly 85% of daily oil needs. It is estimated that a rise of $10/bbl of crude results in 47 bps rise in inflation and 43 bps spike in fiscal deficit as percentage of GDP. This has also put pressure on the INR, which has got back to 74.5/$ levels. With supplies of crude still constrained, there has been little respite as crude has rallied 27% since 01-December 2021. That has put pressure on inflation and on fiscal deficit calculations.