The Indian stock market has been extremely volatile over the past month. Sentiments in the market have been bearish, with NIFTY falling more than 400 points a day twice in November. 

After reaching an all-time high of 18,604.45 in mid-October, NIFTY50 has corrected nearly 8-9% so far. NIFTY fell by 2.9% to 17,026 levels today, with all indices except NIFTY Pharma in deep red. Asian markets are all 1-2% down as a result of panic selling due to rising COVID worries.

Source: TradingView

We cannot attribute this fall to just one reason. There has to be a cumulative effect that is bringing down the market. Let’s dig deeper and understand why the markets are actually falling.

New Covid-19 Variant

South African health authorities have detected a new variant of the novel coronavirus (B.1.1.529) with an “unusual constellation” of mutations. Preliminary data suggests that the alarmingly high number of spike mutations could make the virus more resistant to vaccines, increase transmissibility, and lead to more severe symptoms.

The Indian government has directed states to rigorously screen and test travellers coming from or transiting through three countries where the variant has been confirmed— South Africa, Botswana, and Hong Kong. The United Kingdom and Israel have banned flights from these countries. 

Travel and hospitality stocks are deep in the red today. InterGlobe Aviation fell 7.5% (the most since March) and Spicejet -5.5%. Hospitality company Indian Hotels Ltd fell -7.4%, EIH Ltd by -4.4%, Lemon Tree Hotels Ltd -5.6%, and Chalet Hotels Ltd -7.4%.

Crude oil prices recorded their steepest daily fall since July as the new Covid-19 variant caused panic among investors. Concerns have been raised that a global supply surplus could expand in the upcoming quarter after the release of crude reserves by the US and others. Brent Crude fell 4.9% to $78.15 per barrel.

Reimposing Lockdowns

Most European countries have expanded Covid-19 booster vaccination shots and tightened restrictions overnight. Germany, which has crossed the threshold of 100,000 Covid-related deaths, has imposed strict lockdowns. Slovakia has also announced a two-week lockdown. The Czech government has declared a 30-day state of emergency amid a surge in Covid-19 cases. 

In the current scenario, it would be very difficult to maintain the pace of recovery if new lockdown restrictions are imposed across the globe. 

Heavy Selling by FIIs

Foreign Institutional Investors have (FIIs) have been on a selling spree in India this financial year (FY22). There has been a net outflow of Rs 17,900 crore in the equity cash market in November and more than Rs 87,000 crore since April! Many institutions have booked profits at the peak. The constant selling has dampened the spirit of investors. Reports suggest that foreign investors are withdrawing based on the US Federal Reserve’s plans to taper the massive stimulus and eventually hike interest rates. The move would narrow the interest rate differential between the US and emerging markets such as India, making them less appealing.

Recently, global brokerage firm CLSA suggested that it is “time to book profits from the Indian markets”. It raised concerns regarding the surge in energy and broader input price pressures that are causing downward pressure on the margins of companies. CLSA has also flagged concerns over expensive valuations. FIIs are now looking at investing in the Chinese market due to attractive valuations and expectations of ease in government policies.

Meanwhile, Domestic Institutional Investors (DIIs) have net-bought shares worth over Rs 13,000 crore in November so far, and more than Rs 69,000 crore since April. It would be a difficult task for DIIs to continue supporting the market without the help of FIIs.

What Next?

From March 2020 till date, NIFTY has not closed a month below its previous month’s low. If NIFTY closes in its current levels (~17,025), it would be the first time since March 2020 that the index closes a month below the low of the previous month. In technical analysis, such a pattern is never a good sign. Is this the beginning of a major correction? We will have to wait and watch.

1 Month Candle of NIFTY

Remember to hold on to fundamentally strong stocks in your portfolio. Maintaining strict stop losses on your swing positions is also not a bad idea. Book profits from the random stocks in your holdings and re-invest in good quality stocks.

Do you think there are more reasons for NIFTY’s correction? Let us know in the comments section of the marketfeed app.