Nifty drops below 17,000: Five key reasons why Indian shares slumped

Indian equities tanked 1.5% on Friday with the Nifty breaching the psychological level of 17,000 points amid a market-wide sell-off as investors booked profit tracking cues in the Asian markets.

The BSE benchmark Sensex closed slumped 889.40 points, or 1.54%, to end at 57,011.74. The Nifty50 ended 1.53% down at 16,985.20.

The broader markets were a shade deeper, with the mid-cap and small-cap indices down more than 2%.

Indian markets have declined in the four of the past five sessions as investors book profit ahead of the year-end holiday season.

On Friday, the indices were dragged down by selling in high beta stocks – banks, real estate and automobiles. Bank Nifty lost 1.97% while the BSE Realty cracked 3.87% and the BSE Auto skid 2.54%.

Here’s a quick look at the main factors worrying Indian markets.

Continued selling by FPIs

Foreign portfolio investors (FPIs), the main driving force behind Indian equities for more than a decade, have sold shares worth Rs 13,000 crore ($1.7 billion) so far in December.

The FPIs are on course to be net sellers for the third straight month, after November (Rs 5,945 crore) and October (Rs 13,550 crore).

Looming Omicron variant

Earlier this week, the World Health Organization (WHO) said it expected an increase in the number of hospitalisations and fatalities related to the new Omicron strain of coronavirus. The variant has been detected in dozens of countries worldwide.

The warnings may reintroduce stricter curbs on business activities, trade and travel, and undo economic recovery after the second wave in March-June this year.

In Mumbai, the Maharashtra government reimposed Section 144 of the Indian Penal Code until December 31 to prevent crowds from gathering. Delhi on Thursday reported the sharpest daily spike in coronavirus cases for nearly four months with 85 fresh infections, including 10 Omicron cases.

Inflation worries

India’s wholesale price index (WPI) inflation hit a record high of 14.23%, the highest since the 2011-12 series, raising fears of a spike in retail inflation and therefore monetary tightening measures by the Reserve Bank of India (RBI).

WPI inflation remained in double digits for the eighth straight month.

Hawkish central banks 

The Bank of England, the central bank of the United Kingdom, became the first major central bank in the world to raise interest rates since the beginning of the coronavirus pandemic.

In a move that shocked equity investors, the BoE raised the bank rate to 0.25% from 0.1%. It said it had to act fearing that inflation would reach three times its target level of 6% by April next year even as current threats of the Omicron coronavirus variant sweeps Britain.

The US Federal Reserve said earlier this week it will speed up the end of its pandemic-era bond purchases and paved the way for three interest rate hikes by the end of 2022 due to high inflation.

The European Central Bank also confirmed it would stop purchases under a bond-buying programme in March 2022.

A hawkish stance and commentary by various central banks could mean that excess liquidity in the market could be sucked out of equity- and other financial instruments.

Weak global cues

Most Asian markets declined on Friday as investors fretted about the rising cases of the Omicron variant of coronavirus. Hawkish central banks made matters worse.

Japan’s Nikkei fell 1.79%. Stock indices in China – The Hang Seng and Shanghai Composite – each fell more than 1%.