Sensex and Nifty witnessing a continuous decline over several trading sessions

The Indian equity markets have experienced a tumultuous period, with the benchmark indices Sensex and Nifty witnessing a continuous decline over several trading sessions. Recently, both indices tumbled significantly, with the Sensex dropping by 671 points to 79,477.83 and the Nifty falling by 202.7 points to 24,210.80. This article delves into the key factors contributing to this recent downturn, exploring the interplay of domestic policies, global market trends, investor behavior, and specific corporate performances.

Key Factors Contributing to the Decline

1. Impact of Domestic Policy Changes

One of the primary domestic factors influencing the decline in Sensex and Nifty is the recent announcement of a hike in securities transaction tax (STT) and short-term capital gains tax in the Budget for 2024-25. These tax increases have had a dampening effect on market sentiment for several reasons:

• Increased Cost of Transactions: The hike in STT directly increases the cost of trading for investors, making it less attractive to engage in frequent buying and selling of securities. This can reduce market liquidity and trading volumes, contributing to a bearish outlook.
• Impact on Short-Term Gains: The increase in short-term capital gains tax affects investors who engage in short-term trading strategies. Higher taxes on profits can lead to reduced incentives for such investors, potentially leading to lower market participation and reduced demand for equities.

2. Foreign Institutional Investors (FIIs) Outflows

Foreign Institutional Investors (FIIs) play a crucial role in the Indian stock markets, often driving significant capital flows. On July 25, FIIs offloaded equities worth ₹5,130.90 crore, according to exchange data. This substantial outflow of foreign funds can be attributed to several factors:

• Global Market Sentiment: Negative trends in global markets, particularly in major economies like the US, can lead to risk aversion among FIIs, prompting them to withdraw investments from emerging markets like India.
• Profit-Taking After Record Rally: The Indian equity markets had witnessed a strong rally prior to this downturn, reaching record highs. FIIs, aiming to book profits, may have chosen to offload their holdings, exacerbating the decline.

3. Global Market Trends

The performance of global markets has a significant influence on Indian equities. On July 24, major US markets ended significantly lower, which had a cascading effect on Asian markets, including India. Key global factors impacting market sentiment include:

• Economic Uncertainty: Ongoing economic uncertainties, such as inflation concerns, interest rate hikes by central banks, and geopolitical tensions, contribute to a risk-off sentiment among global investors.
• Oil Prices: The decline in the global oil benchmark Brent crude by 0.76% to USD 81.09 a barrel can indicate broader economic concerns, affecting global trade and investment flows.

Corporate Performance and Sectoral Impact

1. Axis Bank’s Disappointing Earnings

From the Sensex pack, Axis Bank saw a nearly 6% decline after its June quarter earnings failed to meet investor expectations. Corporate earnings are a critical determinant of stock prices, and disappointing results from a major player like Axis Bank can significantly influence market sentiment.

2. Sectoral Weakness

Other notable laggards in the Sensex pack included JSW Steel, Tata Steel, ICICI Bank, Power Grid, UltraTech Cement, and Titan. Sectoral performance plays a crucial role in the overall market movement:

• Steel Sector: The decline in JSW Steel and Tata Steel stocks can be attributed to concerns over global demand, price fluctuations, and potential regulatory challenges.
• Banking Sector: Besides Axis Bank, other banking stocks like ICICI Bank also witnessed declines, reflecting broader concerns over asset quality and earnings growth.

3. Positive Performers

Amid the overall market decline, certain stocks like Tata Motors, Larsen & Toubro, HDFC Bank, and Kotak Mahindra Bank managed to post gains. These positive performances can provide some balance to the market but are often overshadowed by broader negative trends.

Broader Economic Indicators

The recent market decline can also be linked to broader economic indicators and investor sentiment:

1. Inflation and Interest Rates

Concerns over rising inflation and potential interest rate hikes by central banks globally can influence market sentiment. Higher interest rates can lead to higher borrowing costs for companies, impacting their profitability and growth prospects.

2. Geopolitical Risks

Ongoing geopolitical tensions, such as trade disputes and regional conflicts, can contribute to market volatility. Investors tend to move towards safer assets during such times, leading to a sell-off in equities.

Technical Analysis

Technical analysis provides another layer of understanding market movements. The continuous decline over five trading sessions suggests a bearish trend in the market, with key support levels being tested:

• Support Levels: For the Sensex, the next key support level to watch is around 78,000, while for the Nifty, it is around 24,000. Breaching these levels could lead to further downside.
• Resistance Levels: On the upside, resistance levels for the Sensex and Nifty are around 81,000 and 25,000 respectively. Breaking these levels could indicate a potential reversal.

Market Sentiment and Future Outlook

Market sentiment remains cautious amidst these developments. Investors are closely monitoring corporate earnings, global economic indicators, and domestic policy changes to gauge future market direction. Key considerations for the future include:

1. Earnings Season

The ongoing earnings season will be crucial in determining market direction. Strong earnings from major corporations could help stabilize the market, while disappointing results could exacerbate the decline.

2. Monetary Policy

Central bank policies, both domestic and international, will play a significant role in shaping market sentiment. Any indications of rate hikes or monetary tightening could influence investor behavior.

3. Global Economic Trends

Global economic trends, including trade data, GDP growth rates, and inflation figures, will continue to impact market sentiment. Investors will be looking for signs of economic stability or potential risks.

The recent decline in Sensex and Nifty is driven by a combination of domestic policy changes, significant FII outflows, global market trends, and specific corporate performances. While certain sectors and stocks have shown resilience, the overall market sentiment remains cautious. Investors need to stay informed about key economic indicators, corporate earnings, and policy developments to navigate this period of volatility effectively. As always, a diversified investment approach and a focus on long-term fundamentals can help mitigate risks during turbulent times in the market.