 |
|
The Indian stock market experienced a significant downturn on Tuesday, with the Sensex and Nifty indices extending their losing streak for the third consecutive session. This decline can be attributed to a confluence of factors, both domestic and international, that weighed heavily on investor sentiment. The primary drivers of the market slump included weak global cues emanating from Asian and US markets, persistent selling pressure from Foreign Institutional Investors (FIIs), a sharp fall in Japanese bond prices, uncertainty surrounding India-US trade negotiations, rising global trade tensions, a weakening rupee, a downgrade of the US debt outlook by Moody's, and renewed concerns over a resurgence of COVID-19 cases. The combination of these elements created a risk-averse environment, prompting investors to shed their holdings and triggering a broad-based sell-off across various sectors.
The negative sentiment was initially sparked by unfavorable developments in global markets. Asian markets, mirroring the weakness observed on Wall Street, traded predominantly in the red. South Korea's Kospi index experienced a notable decline, while US Futures pointed to a subdued opening for the American markets. This weakness was further exacerbated by hawkish commentary from the US Federal Reserve, specifically from Atlanta Fed President Raphael Bostic, who projected only one rate cut in 2025. Bostic's statement reinforced concerns about persistent inflationary pressures and signaled a more cautious approach to monetary policy easing, thereby dampening investor optimism and triggering a flight to safety. The prospect of prolonged higher interest rates in the US exerts upward pressure on the dollar, making emerging market assets less attractive and contributing to capital outflows.
Furthermore, the sharp decline in Japanese government bond yields added another layer of complexity to the global economic landscape. The yield on 20-year Japanese government bonds surged to its highest level since 2000 following a weak auction, while the 30-year yield reached a record peak. This sell-off in Japanese bonds raised concerns about the country's fiscal situation and the potential for increased borrowing costs. Analysts warned that the rising bond yields in Japan could contribute to global uncertainty and negatively impact risk sentiment across markets. Japan's ultra-loose monetary policy has been a key feature of the global financial environment for many years, and any significant shift in this policy can have far-reaching consequences.
On the domestic front, the relentless selling by Foreign Institutional Investors (FIIs) continued to exert downward pressure on Indian equities. On Monday, FIIs offloaded shares worth Rs 525.95 crore, contributing to the overall bearish sentiment. According to VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, the markets may be entering a period of consolidation due to stretched valuations. Vijayakumar cautioned that high valuations could limit the upside potential and trigger institutional selling during rallies. The continuous outflow of foreign capital highlights concerns about the attractiveness of Indian equities relative to other investment destinations. Factors such as global economic uncertainty, rising interest rates in developed markets, and potential political risks can all contribute to FII outflows.
Adding to the market's woes was the uncertainty surrounding ongoing India-US trade negotiations. Commerce Minister Piyush Goyal recently concluded a four-day visit to the US, during which both sides attempted to finalize a trade deal before the imposition of US tariffs later this month. Dharmesh Kant, head of equity research at Cholamandalam Securities, noted that the market is awaiting a significant trigger, which could potentially be the announcement of an India-US trade agreement. The lack of clarity regarding the outcome of these negotiations has created a sense of unease among investors, who are wary of potential disruptions to trade flows and economic growth. A successful trade deal could provide a much-needed boost to investor confidence and stimulate economic activity.
Concerns over rising global trade tensions also contributed to the negative sentiment. US Treasury Secretary Scott Bessent recently warned of potential tariff hikes on key trading partners. Market experts believe that any such measures could revive fears of a global slowdown and trigger sharp volatility in risk assets. The specter of a trade war looms large over the global economy, and any escalation in trade disputes could have significant repercussions for businesses and investors worldwide. The imposition of tariffs can disrupt supply chains, increase costs for businesses, and ultimately lead to slower economic growth.
The weakening of the Indian rupee further compounded the market's problems. The rupee depreciated by 13 paise to 85.55 against the US dollar in early trade, driven by weak domestic equities and continued foreign fund outflows. Traders attributed the dollar's strength to rising US 10-year bond yields, which in turn pressured emerging market currencies, including the rupee. A weaker rupee makes imports more expensive and can contribute to inflationary pressures. It also makes it more difficult for Indian companies to repay their foreign debt obligations.
Adding to the global economic concerns, Moody's, a global ratings agency, downgraded the outlook on US sovereign debt, citing concerns over long-term fiscal discipline. While the downgrade did not represent an immediate threat, it added to the risk-off sentiment in financial markets. Vijayakumar noted that the downgrade has created an undercurrent of unease, causing investors to become more cautious amid heightened uncertainty. A downgrade of the US debt outlook can raise concerns about the long-term sustainability of the US economy and its ability to meet its financial obligations.
Finally, investor sentiment was further dampened by renewed concerns over a surge in COVID-19 cases. While the pandemic has largely faded from the headlines, cases are rising again, particularly in major Asian cities like Hong Kong and Singapore. India has also begun to see a gradual increase, with 164 new cases reported since May 12. Although the number of active cases remains relatively low, the resurgence of COVID-19 serves as a reminder of the potential for future disruptions to economic activity. The fear of renewed lockdowns and travel restrictions can negatively impact investor confidence and weigh on market sentiment. In summary, the Indian stock market's decline on Tuesday was driven by a complex interplay of global and domestic factors, highlighting the interconnectedness of the global financial system and the vulnerability of emerging markets to external shocks. The market's future performance will depend on the resolution of these various challenges and the ability of policymakers to restore investor confidence.