A significant correction in the shares of HDFC Bank, the country’s largest lender, led to a decline in the markets on Wednesday. Both the benchmark Sensex and the Nifty dropped nearly 1.2 per cent each, marking their biggest single-day fall in nearly two months. Concerns about rising crude oil prices and valuations added to the bearish sentiment, as investors also awaited the Federal Reserve’s monetary policy decision.
Closing at 66,801, the Sensex fell 796 points or 1.2 per cent, while the Nifty declined 232 points to end the session at 19,901. This drop was the most substantial for both indices since July 21 and ranks among the sixth-largest declines for the calendar year 2023.
HDFC Bank’s shares slid 4 per cent after the bank indicated a potential negative impact on its key financial ratios due to its merger with the former HDFC. The bank has the highest weightage in both the Sensex and the Nifty and accounted for over half the losses in these indices. Shares of Reliance Industries (RIL), which has the second-highest weightage, dropped 2.2 per cent, contributing to a 163-point decline in the Sensex.
Nomura’s latest note flagged concerns about reductions in net interest margins and a surge in bad loans in HDFC’s corporate loan book. The firm lowered its target price for HDFC Bank from Rs 1,970 to Rs 1,800.
Foreign portfolio investors sold shares worth Rs 3,111 crore, and domestic institutional investors were net sellers of Rs 573 crore worth of shares on Wednesday. HDFC Bank remains a top holding for both investor categories.
“The crucial question now is whether the margin pressures are unique to HDFC Bank or a broader industry issue. Analysts are currently uncertain,” stated Andrew Holland, CEO of Avendus Capital Alternate Strategies.
Globally, surging crude oil prices have stoked inflation concerns, complicating central banks’ efforts to achieve their inflation targets. Brent crude has risen 13 per cent over the past three weeks and is currently trading close to $95 a barrel.
In the UK, a decline in inflation to its lowest level in 18 months eased concerns about a trajectory of rate hikes. The consumer price index rose 6.7 per cent year-on-year in August, compared to 6.8 per cent the previous month.
“High oil prices have left investors uneasy, as this could force central banks to maintain higher rates for an extended period,” noted Deepak Jasani, head of retail research at HDFC Securities.
Market breadth was weak, with 2,207 stocks declining and 1,476 advancing. More than two-thirds of Sensex stocks fell. The Nifty Midcap 100 and Nifty Smallcap 100 indices dropped 0.3 per cent and 0.9 per cent, respectively. Analysts warned of a potential steeper correction in the mid and small-cap segments, urging investors to remain cautious.
“The exuberance in mid and small-caps has pushed valuations to high levels. It remains to be seen whether the sharp rise in many of these stocks will translate into real gains. Investors may do well to focus on high-quality large-caps,” advised VK Vijayakumar, chief investment strategist at Geojit Financial Services.