Sensex & Nifty 50 Drop 1%: Why is the Market Falling?

Indian stock market benchmarks, the Sensex and the Nifty 50, each tumbled over 1% in early trade on Friday, August 2, due to a broad-based selloff prompted by weak global cues.

The Sensex opened at 81,158.99, down from its previous close of 81,867.55, and declined over 1% to 80,995.70. Similarly, the Nifty 50 started at 24,789, down from its previous close of 25,010.90, and quickly dropped over 1% to 24,723.70.

By around 9:45 am IST, the Sensex had fallen 1.03% to 81,022.76, while the Nifty 50 was down 1.02% at 24,756.25.

The selloff was widespread, with the BSE's mid and smallcap indices falling up to 1.5%. Consequently, the overall market capitalization of firms listed on the BSE dropped from nearly ₹462 lakh crore to about ₹457 lakh crore, causing investors to lose around ₹5 lakh crore within the first hour of trading.

Reasons for the Decline in the Indian Stock Market:

Weak Global Cues:

● Global sentiment negatively influenced the Indian stock market as major US and Asian markets plunged due to concerns over slowing economic growth, highlighted by weaker-than-expected US factory data.

● According to a Reuters report, the Institute for Supply Management (ISM) reported that its manufacturing PMI fell to 46.8 last month, the lowest since November, from 48.5 in June. A PMI below 50 signifies a contraction in the manufacturing sector, which constitutes 10.3% of the economy.

● V K Vijayakumar, chief investment strategist at Geojit Financial Services, noted that the ISM Manufacturing index drop to 46.6 spooked markets, rekindling recession fears in the US. The market, which had been rising on soft landing expectations, is now nervous about the potential for a US recession and its market impact.

Valuation Concerns:

● Rising concerns over valuations have been flagged by experts, indicating that the market might be due for a correction.

● According to Trendlyne, an equity research platform, the current PE (price-to-earnings ratio) of the Nifty 50 is 23.5, above its two-year average PE of 22. The current PB (price-to-book value) of the index is 4.22, slightly above its two-year average PB of 4.09.

● Vijayakumar mentioned that there is no fundamental support on the valuation front, with Nifty 50 expected to see earnings growth of around 15% this year.

Geopolitical Tensions:

● Geopolitical issues also dampened domestic market sentiment following Israel's announcement that Mohammed Deif, head of Hamas' military wing, was killed in an Israeli airstrike in Gaza last month. This followed the killing of the group's political leader, Ismail Haniyeh, in Tehran.

● Vijayakumar expressed concern over escalating tensions in West Asia, fearing potential retaliation from Iran and a worsening regional conflict.