Sensex, Nifty tank 1% each: 5 factors behind market selloff

NEW DELHI: Benchmark indices saw profit booking in Friday's trade, with Nifty50 witnessing selling pressure after coming close to the 18,000-mark.

The 50-pack index hit sub-17,800 level while the BSE barometer Sensex fell over 600 points by noon. Both indices were trading over 1% lower from their previous close.

The combined market capitalisation of all BSE-listed companies fell Rs 2.45 lakh crore to Rs 278.07 lakh crore from a record Rs 280.52 lakh crore a day ago.

Most Asian markets were trading lower, tracking an overnight tepid close for US equities. Hurting the sentiment further was a rise in the dollar to a one-month high, as Federal Reserve policymakers continued to talk up the need for further interest rate hikes ahead of their key Jackson Hole symposium next week.

Here are the key reasons why the market was weak today:

Selling was observed in index heavyweight and a few banking names such as , and . Reliance Industries was trading 1.35 per cent lower at Rs 2,624.60. The government on Thursday hiked the windfall profit tax on the export of diesel to Rs 7 per litre and brought back a tax on jet fuel exports, but slashed the levy on domestically produced crude oil in line with softening rate.

Among banks, slid 3.5 per cent. SBI, ICICI Bank, HDFC Bank fell 2.4 per cent. Among financials, and fell over 2 per cent each.

• Dollar rally

The dollar climbed to a fresh one-month high against a basket of major peers on Friday. The dollar index rose 0.121 per cent to 107.620, after earlier touching 107.68, its highest since July 18, Reuters reported.

The gauge is on track for a 1.89 per cent rally this week, which would be its best weekly performance since June 12, after St. Louis Fed President James Bullard said he is leaning toward supporting a third straight 75-basis-point interest rate hike in September, while San Francisco Fed colleague Mary Daly said hiking rates by 50 or 75 basis points next month would be "reasonable."

The dollar index shares an inverse relationship with equities.

• Technical weakness

The bulls were looking tired, given Nifty50 had pushed its winning run to eighth straight session by Thursday. The ‘RSI Smoothed’ oscillator had given a negative divergence on the lower time frame chart in the overbought zone, which analysts said was the first sign of caution.

Besides, the last couple of sessions had seen the formation of small indecisive candles. The selling on Friday was seen when the Nifty50 was at a kissing distance from the 18,000 level, suggesting traders were jittery near the key mark.

• Market valuations

The market has bounced back smartly in the last one-and-a-half month, wiping out its entire decline year-to-date. With this rally, Nifty50 now trades at 21 times FY23E EPS, comfortably above its long-term average, Motilal Oswal said.

"The elevated valuations do not justify further run-up in markets. Some profit booking and diversion of money to fixed income may be considered as a short-term strategy. Buy on dips can be considered in high-quality financials, leading names in capital goods and autos," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Motilal Oswal in a strategy note said the upside from here on will be a function of stability in global and local macros, and continued earnings delivery versus expectations.

• FPI outflows

There are fears that a sharp rise in the dollar may result in risk-off trade in emerging market equities. On Thursday, FPIs were net sellers of domestic stocks to the tune of Rs 1706 crore.

Vijayakumar said a sudden sharp spike in the dollar index to will impact capital flows to emerging markets such as India. "The consistent FPI buying seen in August is likely to lose steam impacting sentiments," he said. Data showed FPIs have bought equities worth Rs 41,024 crore so far in August.

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