Sensex, Nifty fall 5% in five sessions; can market bounce back?

The ongoing Russia-Ukraine conflict, persistent rise in inflation, and the possibility of looming interest rate hikes have triggered sell-off in global equities, prompting investors to shift focus to safe-haven assets like gold, bonds, and U.S. dollar. The Indian share market also faced the wrath of investors, with equity benchmarks, the BSE Sensex and the NSE Nifty, falling 5% in the past five sessions.

On Thursday, the 30-share Sensex extended its losing streak for the fifth straight session and closed 1,158 points, 2.14% lower, at 52,930, with 28 index heavyweights closing in the red zone. In a similar trend, the Nifty50 settled 359 points lower at 15,808. India VIX, a volatility index based on the NIFTY index option prices, surged as much as 11%, breaching 25 levels.

The sell-off in the domestic market was triggered by weak global cues as investors weighed aggressive policy tightening by the U.S. Federal Reserve and strict Covid-19 lockdown measures in China. The market sentiment was further dented after global research firm Morgan Stanley cut India's 2022-23 economic growth forecast by 30 basis points to 7.6% for FY23, from 7.9% estimated earlier, citing escalated geopolitical tensions and a slowdown in global economic growth.

Given the recent fall in benchmark indices, market experts believe the market has entered oversold territory and now a technical pullback could be on the cards. According to ICICI Securities report, the NSE Nifty is in oversold condition and the index may hold key support threshold of 15,600 and gradually stage a pullback towards 17,100 in coming months.

Technical outlook

Analysts at ICICI Securities peg that the 50-share NSE Nifty may respect 15,600 support levels and rebound towards 17,100 as it is 50% retracement of entire decline since April 2022 (18,115-15,992) coincided with May 2022 high of 17,132.

As per ICICI Securities report, past five weeks correction has hauled the Nifty midcap and small cap indices to 50% and 61.8% retracement level of their respective CY21 rally amid extreme oversold condition, indicating impending technical pullback in coming weeks, says report.

“Going forward, key support for the Nifty is at 15,600. We expect the Nifty to hold the 15,600 mark and gradually stage a pullback rally towards 17,100 in coming months,” the brokerage said in a report dated May 11.

Here are key factors that triggered sell-off in Indian share market:

Surprise rate hike by RBI

In an unexpected move, the Reserve Bank of India (RBI) last week raised the key policy repo rate by 40 basis points (bps) to 4.40% and cash reserve ratio (CRR) by 50 bps with immediate effect, citing inflationary pressures in the economy. RBI Governor Shaktikanta Das-led Monetary Policy Committee (MPC) in an unscheduled meeting on May 6 raised lending rates for the first time since August 2018, albeit it maintained an accommodative stance. During the pandemic, RBI had reduced the policy repo rate by 115 bps in 2-instances -- first 75 bps in March 2020 and thereafter 40 bps in May 2020 -- and it has been kept unchanged since then.

SBI Research in its latest Ecowrap report said the central bank may go for other rounds of rate hikes in June and August and that a 75 basis points rate hike in FY 2022-23 looks imminent. "The risk is getting re-priced properly. The situation is different than during the global financial crisis wherein the lending started increasing aggressively (FY05 onwards) much before the rate hike cycle began (Mar’2010 till Oct’2011). Currently, the rate hike cycle has begun and now the bank lending will increase factoring in the risk," said Soumya Kanti Ghosh, group chief economic adviser, SBI Research.

Continued sell-off by foreign investors

The foreign investors are on a selling spree in the Indian equity market for the eight consecutive month in April amid fear of hawkish policy stance by central banks globally and the headwinds in terms of higher crude prices and rising inflation. In the first four months of the calendar year 2022, foreign investors have withdrawn ₹1.5 lakh crore from the Indian markets including equity, debt and hybrid assets due to escalated geopolitical tensions and the U.S. Fed’s hawkish timetable and roll back of economic stimulus. Adding to it, uncertainty about global economic growth outlook in the backdrop of the ongoing Russia-Ukraine conflict and Covid-19 outbreak in China also soured investors’ appetite for riskier assets.

Fear of aggressive rate hike

One of the key reasons for the recent slump in Indian equities is the fear of aggressive rate hikes by the central bank across the globe, especially the United States, to contain rising inflation. The possibility of sharper interest rate hikes by the U.S. Federal Reserve have prompted foreign investors to pull out money from the Indian equity market despite the fact that the U.S. have already raised official interest rates by 75 basis points in the last two policy meetings. The higher interest rates raises the fear of a recession, given that the economy is already battling with high inflation, surge in commodity prices amid the Russia-Ukraine crisis, and Covid-related supply chain disruptions.

The surge in U.S. inflation in April further bolstered the chance of aggressive interest rate hike by the Federal Reserve in coming months, even after chairman Jerome Powell last week downplayed any significant movement in rates in near-term future. The Labor Department's monthly consumer price index (CPI) data showed that inflation rose by 0.3% to 8.3% YoY in April despite a significant drop in crude oil prices.