The market continued to decline, despite expectations that the Federal Reserve might announce rate cuts during their speech overnight, potentially causing a market bounce. However, the market seems to be ignoring this narrative of interest rate cuts, focusing instead on the recent actions of foreign institutional investors (FIIs). These investors are causing more selling in the market, driven by concerns around SEBI’s new circular on derivatives positions. Domestic investors, on the other hand, are not yet selling, but FIIs continue to liquidate their positions, with nearly $0.8 billion sold just yesterday.
Where is the market headed?
Market Overview
The market has now dropped for three consecutive days, erasing nearly all the gains from the sharp rebound we saw last Thursday afternoon. The strength that seemed to have emerged in the market has quickly vanished, and now it looks like we are headed downward. This could largely be attributed to the liquidity of the selling, and at some point, the buying will no longer be able to absorb this amount of selling. The last three days of selling have not yet stopped, and we are currently in the latter half of December, which is typically a thinly traded period for foreign investors. However, this time, foreign investors have been fully involved, selling as the year draws to a close. Most foreign investors follow a January-to-December financial year, so they may be looking to reduce their positions in India before year-end.
The market had recently rallied from around 23,300 to 24,900, but now we’ve seen a pullback of roughly 650–700 points from the recent top. More may follow in the coming days. If the market consolidates and forms a new bottom around the 23,900 level, it may not be such a bad outcome. While the market’s numbers over the past three months haven’t been encouraging, and there’s growing pessimism, such periods of consolidation could pave the way for better returns in the future. Historically, after a period of no gains—whether it’s six months, a year, or even two to three years—the next few years tend to see better returns. Therefore, while the market is experiencing some disappointment with the current situation, especially since the rally fizzled out, there’s hope that a consolidation period could set the stage for more favorable conditions down the road.
As of now, the Nifty is down 0.56% for the day, and we’re essentially back to where we were in July. This means that over the past six months, there has been no net gain or loss on a Nifty basis, which is normal in the markets. There are times when the market goes through periods of no gains, but historically, these have been followed by stronger returns. While the recent rally seems to have stalled, any further rally would need the Nifty to surpass the 24,900 mark.
Nifty Next 50
For now, Nifty Next 50 is down by 1.3%, which is a sharper drop than the Nifty, indicating a collapse in many of the mid-cap stocks. However, the recent bottom has not been decisively breached, and there’s still hope that it could form a higher low compared to the previous one.
Nifty Mid and Small Cap
The mid-cap sector, though down by 0.6%, is still holding up relatively well, with stocks still within the range of their previous highs. Small caps are similarly holding their ground, with a smaller decline of 0.68%.
Nifty Bank Overview
The Bank Nifty has also reverted to its previous average level of around 51,998, down 1.3%. This chart also shows that recent lows have been breached, and we’re back to a range-bound situation.
Advanced Declined Ratio Trends
Momentum for the day is significantly negative, with 135 advances compared to 357 declines, indicating a clear dominance of selling.
Nifty Heatmap
The heat maps are largely red, with very few stocks in the green. Some of the notable gainers include Reliance, which gained 0.6%, Wipro at 1.2%, and a few pharma stocks like Dr. Reddy’s and Sun Pharma. On the downside, major stocks like Tata Motors (-3%), Power Grid (-2.5%), and HDFC Bank (-1.2%) were sold off heavily. The Nifty Next 50 is all red, with hardly any green stocks. Public sector financials like PNB (-2.8%), IRFC, PFC, and REC have seen significant declines, along with some capital goods stocks and public sector enterprises like Adani Green, Siemens, and IOC.
Sectoral Overview
Metals, commodities, and private banks have also been hammered down.
The market seems to be moving toward defensive stocks, with FMCG, IT, and Pharma showing resilience. FMCG, despite its challenges, managed to retain its levels for the day, while IT gained 0.3% and Pharma outperformed with a 1.1% increase. These three sectors—pharma, IT, and FMCG—have emerged as relative winners in this market downturn. On the other hand, the broader market, especially in large caps, has been hit hard, while mid and small caps have shown more stability.
Sectors of the Day
Nifty Pharma Index
Stock of the Day
Craftsman Automation
One notable exception in this weak market was Craftsman Automation, which saw a remarkable 11% gain for the day. This stock stood out as the stock of the day, showing that there are still pockets of strength in an otherwise downbeat market. Craftsman Automation’s strong performance was a welcome break from the otherwise bearish trend, offering hope that individual stocks in specific sectors could still outperform.
Story of the Day
The major news impacting the market is SEBI’s new circular regarding foreign portfolio investors (FPI) and their use of derivatives. SEBI has now prohibited FPIs from issuing offshore derivative instruments (ODIs) based on derivatives as underlying assets. Essentially, if the underlying asset is a stock, FPIs can issue P-notes, but not if the underlying asset is a derivative. This has caused a significant sell-off since the announcement, particularly from Tuesday to Wednesday. SEBI’s concern is that offshore funds might be issuing derivatives and hedging them in the Indian market, which can create hidden risks. The immediate impact of this regulation is that no new P-notes can be issued based on derivatives, and existing positions will need to be redeemed within a year. While the total value of such positions is estimated to be around 3,000 crores, this is not a large amount relative to the overall market cap. Nevertheless, the news has triggered a knee-jerk reaction, adding to the selling pressure, and causing a drop in market sentiment.
The broader implication of SEBI’s move is an increased focus on transparency and accountability, particularly in the derivatives market. By curbing the use of P-notes and derivatives, SEBI is aiming to prevent misuse and ensure that investments in the Indian market are backed by actual stocks. While P-notes represent only a small part of the market (around 2% of FII exposure), the market’s reaction is more sentiment-driven. The aim of SEBI’s regulation is to increase market transparency and prevent potential misuse, including concerns around round-tripping, where money is taken out of India and then brought back as foreign investment. The immediate market impact is likely short-term, with some estimating the market cap has fallen by 3,000 crores, but this is not expected to have a long-term effect.
There are both pros and cons to this regulation. On the positive side, it could reduce market volatility by limiting the ability of external entities to leverage derivatives. It could also enhance transparency, as regulators will have better visibility on who is backing P-notes or ODIs. On the downside, it could reduce liquidity in the market, as some foreign investors may be discouraged from participating. It also increases the compliance burden for those involved in the market, which may lead some investors to look elsewhere. While the long-term impact on foreign investment is uncertain, such knee-jerk reactions are often short-lived unless they represent a structural shift in market behavior.
In conclusion, while SEBI’s actions have certainly shaken market sentiment in the short term, the underlying intent is to increase transparency and prevent misuse. The immediate impact has already been felt, but it is unlikely to have significant long-term consequences. The current market turmoil may be more about year-end lethargy and a general pullback in sentiment. Let’s see how the markets perform in the remaining days of December and as we move into the new year.
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