The chart tells you just one side of the story. The bigger concern for the market on all these days has been the way it has tried to scale higher and then failed to sustain at higher levels. The table below captures how the index fell from the intraday high on these days
|Date||Nifty Fall||Fall from High||Sensex Fall||Fall from High|
Just look at the index performance over the last five days. For example, on 12 March, the Sensex was down 487 points but fell 1,030 points from the peak. Similarly, on 16 March the Sensex closed 31 points lower but was 494 points off the peak. On 18 March, the Sensex was down 585 points but actually fell 1080 points from the top. This not only shows the underlying weakness in the market plus traders using every bounce to take profits off the table. What exactly triggered this market fall over last 5 days?
3 factors triggered the sharp fall in Nifty and Sensex
The fall in the indices becomes stark because the indices had made a tremendous effort to get above the psychological resistance levels of 15,000 on the Nifty and 51,000 on the Sensex. Now, both these levels have been decisively breached on the downside. Here are the three factors that triggered the sharp fall.
a) Bond yields in the US are the big reason for the fall. Since July 2020, the US benchmark 10-year bond yields have risen from 0.51% to 1.74%. On 18 March, despite the dovish tone of the FOMC, the US bond yields continued to rally. Higher bond yields hint that the markets do not believe the Fed can keep rates at the 0.00%-0.25% range till 2023. That would mean debt outflows from India and pressure on the RBI to hike rates. These fears kept the equity markets on tenterhooks.
b) COVID cases are rising at a time when India thought it had done amazingly well in vaccinating its population. India suddenly started recording around 35,000 fresh COVID cases every day, with the financially prosperous Maharashtra accounting for over 40% of these cases. With death toll at 1.60 lakhs and over 170 deaths daily, markets apprehend another round of lockdowns. With GDP growth still struggling to recover, the resurgence of COVID could derail the nascent economic recovery.
c) Banks and financials, which account for over 35% of the Nifty weight, have been under pressure in the last few days. While the risk of rising NPAs is a major concern, the immediate worry is on SEBI restrictions on AT-1 bonds. Banks have issued AT-1 bonds and Tier-2 bonds to the tune of Rs350,000cr of which Rs70,000cr is held by mutual funds. If SEBI imposes stricter provisioning norms, it will not only result in losses for mutual funds but a rush to sell and exit such bonds. That has put banks under pressure.
But, markets are ignoring the good news
While there are some concerns, it is not as bad as the market fall is making it appear. Firstly, FPI flows have turned distinctly positive in the last 3 days and FPIs have now infused Rs5,100cr in the midst of this market fall. Secondly, sharp corrections in the market are normally accompanied by rising VIX. This time around, the Volatility (VIX) has been consistently falling in the midst of falling markets. Over the last 15 days, the VIX has actually moved down from 26 levels to 20 levels.
Above all, the FOMC statement on 17 March is an indication that low rates and sufficient liquidity are here to stay. The Fed went to the extent of reassuring the markets that rates would stay at 0.00% to 0.25% till the end of 2023 and monthly bond buying would be at a bare minimum of $120 billion. Clearly, the stock markets in the last 5 days have ignored the good news and over-reacted to the bad news. That is neither fair, nor sustainable!