What has actually triggered the fall and is it temporary or are their structural issues at play. Remember, FPIs have infused nearly Rs27,000cr into equity and debt in the month of February and the markets have fallen despite that. Here are five reasons that actually led the Nifty falling below the 12,000 mark.
Supreme Court order on AGR rattles markets
The Supreme Court came down heavily on the telecom companies and on the DOT for laxity in paying up the AGR (adjusted gross revenues) dues. On 14 February, the Supreme Court asked the telcos to immediately pay a part of the sum and complete the payments before the next hearing on March 17. While Bharti Airtel has paid up Rs10,000cr and Vodafone Idea has paid up Rs2,500cr, the real challenge is for Vodafone. The stock is quoting at Rs3, it has been making losses for many quarters and promoters have refused any further fund infusion. The cascade effect could be that if the DOT cashes the bank guarantee then Vodafone will have no choice but to go to NCLT and that puts nearly Rs120,000cr worth of fund-based and non-fund based bank facilities in danger.
Retail (CPI) inflation at a 68-month high
If 7.35% inflation in Dec-19 was bad then Jan-20 inflation came in still higher at 7.59%. This raises a number of macro challenges for the market. Firstly, with CPI inflation at 7.59%, any rate cuts are ruled out and the markets even risk a rate hike. Secondly, FPI flows could get impacted because most FPIs found India attractive due to the high real rates of return. That has turned negative and that is causing worry in the markets.
Impact of the Chinese pandemic
The Chinese Coronavirus has already resulted in over 1,800 deaths with more than 75,000 people afflicted by the disease. Above all, the pandemic has led to a virtual travel embargo on China and many factories in the industrial belts have shut down. While that is negative for global growth and for Indian trade, there is a more industry-specific problem for India. Sectors like pharmaceuticals and electronics depend heavily on China for supporting their raw material supply chains. India’s aggressive plans for solar power to the tune of nearly $2 billion are negatively impacted by the Chinese virus. This time around, the impact is not only bigger than SARS but also more impactful in a world increasingly dependent on China.
Disappointment on Q3 earnings
The proof of the pudding lies in the eating and all reforms must eventually result into improved corporate sales and earnings. That does not seem to be the case, especially if you look at the third quarter results. In a nutshell, metals, industrials and oil marketing companies were the big drag on the third quarter numbers. Even the 20% companies that managed to beat street estimates managed it more because the estimates were pessimistic to begin with. Most banks either reported slower growth or higher risk of NPAs and that has not gone down well with the markets, especially considering that financials account for more than 40% of the Nifty weightage. During the third quarter, some of the marquee names like Kotak Bank, L&T, Maruti and Reliance Industries missed estimates.
Moody’s cuts GDP estimate for 2020 and 2021
In its latest India update, Moody’s has downgraded India’s full year GDP growth for 2020 to 5.4%. This will end up being only slightly better than the 5% that India recorded in 2019. More than the cut in estimates it was the sharpness of the cut that shocked the markets. The GDP estimates were cut from 6.6% to 5.4% for calendar year 2020. However, markets were more disappointed that Moody’s had also downgraded Calendar Year 2021 growth projections from 6.7% to 5.8%. While the Coronavirus has been one of the factors, Moody’s has also pointed towards weak growth impulses and larger structural issues for India.
Clearly, there was too much optimism built into the stock markets post the cut in corporate taxes and ahead of the Union Budget. In a way, this is a return to reality.