To compound the problems, the FPIs sold another $647 million of equities in February, over and above the $3.52 billion it sold in the month of January 2023. However, it was not just the FPI selling but even the global cues were not too favourable. But more of that later. Firstly, here is a quick look at key index returns for February 2023.

There was selling across the board in February, with the smaller stocks the worst hit as the quarterly results were under a lot of pressure in the third quarter ended December 2022. While the sales growth was strong overall, the margins came under pressure. But, first a look at the international triggers bothering the markets.

Global macros take a toll on the market

Global triggers for the market were centred on two fronts. Firstly, there was pressure from the hawkishness of the US Fed. The Fed did raise rates by just about 25 basis points in the February meeting of the Federal Reserve. However, what really spooked the markets was the subsequent statements of the Fed governors and the minutes of the FOMC meeting published on 22nds February. The minutes made it crystal clear that irrespective of the quantum of rate hikes already undertaken (450 bps since March 2022), the rate hikes would continue till inflation remained a problem. In fact, the minutes of the Federal Open Markets Committee (FOMC) not only hinted at more rate hikes in the year 2023, but also ruled out any rate cuts in the year and also hinted at terminal rates in the range of 5.50% to 5.75%.

The global hawkishness also had an impact on the stance of the RBI, which also turned distinctly hawkish. But the bigger concern was the impact of weakness in global demand. To begin with, the corporate results for the third quarter clearly showed signs of export sales waning across various sectors. In addition, the export data faltered at a macro level showing that global companies and importers were going slow on consumption and inventory accumulation decisions. With the Fed hinting at more rate hikes, it is likely to raise the inflation expectations globally, and this is likely to be the story across the developed markets like the US, UK and even Europe. Clearly, the global slowdown appears to be a much bigger challenge for the Indian markets, and that translated into index weakness.

Domestic triggers impacting equity markets in 

While the global factors did play a part in depressing the stock markets in February 2023, domestic factors also played a major part. 

1. In line with the Fed, the RBI also adopted a very hawkish stance on rates. In the February policy, the RBI hiked rates by another 25 bps and the minutes of the RBI MPC clearly indicates that the committee would go ahead with rate hikes till inflation came under control. The RBI repo rates are already at 6.50% and now it looks like the terminal rates for the repo could be well beyond 7% during the current calendar year. 
   
    
2. FPI flows continued to be the weak link in February 2023, albeit not as negative as January 2023. After net FPI inflows of $1.36 billion in December 2022; the month of January 2023 saw FPI outflows of $3.52 billion. In comparison, the FPI selling of $647 million was relatively lower in February 2023. However FPIs remained net sellers on most of the days during the month, and that is not great news.
   
    
3. The other concern for the Indian markets was that Indian stock market valuations are now looking less attractive compared to its Asian emerging market counterparts. That has already resulted in a lot of FPI funds flowing out of India and into other Asian markets like South Korea, Taiwan and Indonesia, where valuations are more attractive.
   
    
4. Quarterly results for December 2022 also put pressure on the markets in February 2023. Overall, the operating margins came under pressure, but more importantly, the interest coverage of non-banks has weakened in the December 2022 quarter due to higher interest costs. Also, as deposit rates catch up with lending rates, the perception is that the advantage that banks had for last two quarters would also gradually wane.

Union Budget 2023-24 did have some positives in putting more money in the hands of people, checking the fiscal deficit for FY24 and also the big thrust to capital spending and infrastructure outlays. However, markets are currently reflecting short term concerns, and these are not going away in a hurry.

Sectors that flattered and those that faltered in February 2023

The month of January 2023 saw a very diverse performance of sectors. Of the 16 sectors evaluated, only 2 sectors (FMCG and Digital) showed positive gains. All the other sectors gave negative returns.

Data Source: NSE (shaded sectors outperformed Nifty-50)

Clearly, the negative returns are outweighing the positive returns, but there are 6 out of 16 sectors that outperformed the Nifty.

1. The two sectors to shine and stand out in the month were the FMCG sector and the digital sector. The FMCG sector gained from better rural sales in the quarter and pricing power sustaining for most of the FMCG companies. But the real thrust for the FMCG sector came from ITC Ltd, which has held up and touched new highs amidst very difficult market conditions. The digital space returns were largely driven by HCL Technologies.
   
    
2. There were several other sectors that, despite negative returns, fell less than the Nifty in February. These sectors include IT, private banks, consumer durables and infrastructure. Clearly, IT and consumer durables were on the back of defensive buying. Private banks once again gave stellar NII growth and NIMs in the quarter. Infrastructure stocks did get a big boost from a rather favourable budget announced by Nirmala Sitharaman.
   
    
3. Among the underperformers for the month were metals, PSU banks and oil & gas stocks. Metals saw pressure from input costs and falling prices as the demand thrust from China was more than offset by global weakness concerns. PSU banks have rallied too sharply in the last one year and it was more a return to reality. Oil & gas stocks took a hit on the back of shaky oil prices amidst demand and supply pressures.
   
    
4. With rising rates, some of the rate sensitive sectors also came under pressure and underperformed the Nifty. Automobiles, realty and housing were classic examples of rate sensitive stocks coming under pressure in February. Pharma also came under pressure with a slew of investigations launched by USFDA into pharma company operations during the month of February 2023.

To sum up the story of February 2023, the markets started off on a strong note with the Union Budget, but it was a rude return to reality. Fears of a global slowdown, sustained hawkishness of central banks, rising inflation and weak quarterly numbers were the key pressure points that the stock markets had to contend with during the month.