Markets Continue to Decline as Nifty, Sensex Slide: What's Concerning Investors Right Now?

The key indices, Nifty and Sensex, have dropped close to 1% and breached critical psychological levels. This downturn stems from a mix of macroeconomic concerns, including inflationary pressures, limited prospects for RBI rate cuts, and profit booking in anticipation of the Maharashtra state elections. Additionally, AIF registration-related investments have seen an impact, with funds being cautious amid the current market climate.

Midweek Market Volatility

It’s been a turbulent Wednesday, with Nifty and Sensex continuing the sharp correction trend. Nifty has fallen over a percent, trading around the 23,600 mark, while the Sensex has dropped below the key 78,000 level. Continuous outflows have been one reason for this decline, but investors are also facing a series of macroeconomic concerns.

Inflation Concerns and RBI Rate Policy

India's inflation for October hit a 14-month high of 6.21%, surpassing the 6% threshold that markets had expected. This increase is due to several factors, including base effects, surging vegetable prices, and higher global palm oil costs. JM Financial highlighted a potential 40-bps upside risk to the RBI's inflation expectations, and market consensus suggests that the RBI will likely maintain its rate stance in December, focusing on domestic macroeconomic stability.

Dharmakirti Joshi, Chief Economist at CRISIL, echoed this view, noting that while non-food inflation remains moderate, food inflation spikes have created an upside risk to inflation, which may restrict monetary easing. The Monetary Policy Committee (MPC) is expected to hold rates steady in December. However, food inflation may ease later this fiscal year as new produce enters the market, potentially allowing rate cuts towards the fiscal year's end.

Global Market Influences

Weakness in Asian and US markets has further influenced domestic indices. The Nikkei and Hang Seng closed lower on Wednesday, following a sharp decline in the Dow Jones on Tuesday. However, China’s markets remained resilient, supported by economic stimulus from the Chinese Central Bank.

Foreign Investment Outflows

Foreign institutional investor (FII) selling has been a major factor in the recent downturn. In November alone, FIIs have withdrawn over ₹25,000 crore, following outflows of nearly ₹1 lakh crore in October. Many experts attribute this outflow to an asset reallocation, as India remains highly valued within emerging markets relative to peers like China.

US Federal Reserve Policies and Dollar Strength

Investor sentiment has also been impacted by the US Federal Reserve's stance on interest rates, which has prompted capital reallocation to the US and other developed markets. The resulting dollar strength has made dollar-denominated assets more attractive, increasing outflows from emerging markets, including India.

Market Outlook: Profit Booking Ahead

Ahead of market holidays and state elections, some market observers anticipate further profit booking. According to Kishor Ostwal, CMD at CNI Research, markets may reverse next week, with short covering expected in anticipation of the exit polls. With the Relative Strength Index (RSI) at 25, some analysts forecast potential for a 10% rise in Nifty following the current correction.