The BSE Sensex breached the psychological barrier of 21,000 on 5 November, during the Muhurat trading session of Diwali. It was seen as an indication of a further rally in the already high market.
Favourable domestic sentiments and huge Foreign Institutional Investment (FII) inflows drove the Sensex to a 33-month high early this month. The FII inflows reached $ 12 billion in November, led by the anticipation that the US Federal Reserve Bank may go for some monetary easing. This led to a surge in liquidity and rise in the market.
On 26 November, however, the Sensex closed at its 11-week low of 19,136. The Sensex lost 8.89 per cent and realty, public sector, small-mid cap and metal stocks corrected by 12-26 per cent, over the month. In the past two weeks FIIs turned net sellers, shedding Rs.4310 crores in 12 trading sessions.
Several factors led to this fall. The Bank of America-Merrill Lynch Survey of fund managers first indicated this upcoming correction for November. They saw an impending correction based on the fund managers’ cash positions which were at a seven- year low.
Though the US Fed’s second dose of liquidity pumping gave a positive push to the market, concerns over inflation in China didn’t allow investors to cash in on the positive trigger. China is expected to raise its interest rates to ease the inflation which is at a 25-year high. The debt crisis in Europe, led to an all-out selling in markets across the globe in all asset classes.
Moody’s investor service said it may downgrade Ireland’s ratings further because the bailout may increase the nation’s debt and make it credit-negative. There is also anticipation about the debt crisis spreading to other European countries like Spain and Portugal.
The domestic scenario changed considerably over the month. The fall in the Index of Industrial Production (IIP) numbers for September created a selling pressure. The IIP for September fell to a 15-month low of 4.4% against the market consensus of 6.4%. By the end of the month, things became worse as more skeletons tumbled out of the 2G scam and the CWG fiasco. The resignation of A.Raja, as telecom minister and the discussions on penalizing the telecom companies that benefited out of his favours, sent the market southwards.
The harshest blow, however, was dealt by the loan-for-bribe scam, last week. The sell-off began as senior officials of top banks were taken into custody. Those arrested included officials from LIC, LIC Housing Finance Ltd, Central Bank of India, Bank of India and Punjab National Bank. A total of 21 companies are under the CBI’s scanner. Investors panicked and winded up their positions. LIC is the biggest investor in the market and its name surfacing in a scam worth crores, came as a shock.
The Korean crisis aggravated the panic further, sending the market down by over 600 points, intraday, on the 24th of this month. On 26 November, the Sensex declined to its lowest close, since September 9, at 19,136. It shed a total of 2.3% during the week. "The market is reacting to any newsflow or talk related to the current developments. But, the scope and extent is not yet known," said Nitin Rakesh, CEO of brokerage Motilal Oswal, speaking about the fall in the market, in an interview to the newspaper, Mint.
India’s long term growth rate is estimated at 8.5%. Industry experts see a 20% growth in company financial earnings this year . Irrespective of these factors, many analysts predict a choppy market in the medium term.
The Indian stock market is a high beta market i.e. it is very sensitive to external and domestic factors. Therefore its movements are exaggerated, as compared to its peers. Any negative triggers, globally or within India, can result in a further correction.
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