India’s benchmark indices slumped as much as 1.5 per cent on Wednesday amid a global sell-off triggered by Fitch Ratings’ downgrade of the US government debt.
The Sensex plunged 1,027 points, or 1.5 per cent, in intraday trade before recouping some of the losses to end the session at 65,783, down 676 points, or 1.02 per cent, from the previous day’s closing. The Nifty50 index, on the other hand, settled 207 points, or 1.1 per cent, lower at 19,526. At one point, the 50-share index was down 300 points, or 1.53 per cent, and looked set to post its biggest loss in more than six months.
Key US indices were deep in the red in early trade on Wednesday. While the Dow Jones Industrial Average and the S&P500 slipped 0.7 per cent and 1.2 per cent, respectively, the tech-heavy Nasdaq was down 1.9 per cent as of 08:45 IST.
Fitch on Tuesday downgraded the US’ sovereign credit rating from AAA to AA+. The rating agency said the country’s finances would likely worsen over the next three years due to tax cuts, spending initiatives, and economic disruptions.
The downgrade reminded investors of a similar event in 2011 when S&P Global Ratings gave an AA+ rating during a debt ceiling crisis, which had triggered a sell-off in bond and equities.
While the latest downgrade triggered a selloff in equities, the bond market was relatively unscathed, which helped calm investors’ nerves.
“The downgrade is a small event. Sentimentally it is negative, and there will be some knee-jerk reaction. Even during the S&P downgrade 12 years back, Indian markets had minimal impact,” said U R Bhat, co-founder of Alphaniti Fintech.
Market experts said concerns had emerged over the past few days amid weak economic data from India and abroad.
Corporation tax collection in India declined nearly 14 per cent year-on-year (YoY) to Rs. 1.38 trillion in the first quarter of the current financial year.
“It shows that profitability has probably declined. While GST [goods and services tax] collection has improved, margins are coming down,” said Bhat.
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Weak economic data from China has stoked expectations of more stimulus measures to boost the world’s second-largest economy. Though the manufacturing Purchasing Managers’ Index rose to 49.3 in July from 49.0 in June, it was below the 50-point mark, signalling contraction.
Analysts attributed the stimulus expectation from China as the reason for recent selling by overseas funds. On Wednesday, foreign portfolio investors (FPIs) were net sellers to the tune of Rs. 1,877 crore. Domestic institutional investors, too, were marginal sellers.
“A further stimulus package from China could have some good implications for that economy. But it could also lead to an uptick in commodity prices. Some of the tailwinds India has, including low oil prices, could be affected. At the margin, it takes away the positivity in the short term. And with the Fitch downgrade, there could be a catalyst to take some risk off the table,” said Andrew Holland, CEO of Avendus Capital Alternate Strategies.
Holland said India has had a good run, and a bit of profit booking from FPIs was expected. “The next round of triggers would be in the second half, September onwards, and that would hopefully be the effect of the government spending, and private capex will start to flow to earnings. The only negative in the short term could be higher commodity and agri prices,” he said.
The market breadth was weak, with 2,428 stocks declining and 1,176 stocks advancing. The combined market capitalisation of the BSE-listed firms declined by Rs. 3.5 trillion. HDFC Bank fell 1.25 per cent and was the biggest contributor to the Sensex decline.