Markets reverse amid simmering West Asia tensions

Benchmark stock indices retraced much of their previous day’s gains to correct by a percent each on Tuesday as foreign and retail investors booked profits in heavyweights like Reliance Industries Ltd (RIL), Bajaj Finance Ltd and ITC Ltd. The decline comes amid concerns that rising tensions in West Asia could drive up oil prices and pressure the rupee.

Foreign portfolio investors (FPIs) sold shares worth a provisional 1,970.52 crore while retail and high net-worth individuals (HNIs) sold 611 crore on BSE; National Stock Exchange (NSE) figures are available with a lag.

Their combined selling dragged NSE’s 50-stock Nifty down by 0.99% or 215.50 points to 21,522.10, and BSE’s 30-share Sensex by 1.11% or 801.67 points to 71,139.9.

Domestic institutional investors (DIIs) purchased shares worth a provisional 1,002.7 crore.

RIL, which touched a fresh life high of 2,919.95 at the opening before correcting, alone contributed to nearly a third of Nifty’s fall. Taken together, the profit-booking in RIL, Bajaj Finance, ITC, Larsen & Toubro Ltd (L&T) and HDFC Bank Ltd accounted for over half of the index’s fall.

A day earlier, the RIL stock had surged 7.35% to a high of 2,905, on rumours that the company was close to announcing a separate listing for Reliance Jio and Reliance Retail, after having listed Jio Financial Services last August. RIL contributed almost two-fifths of Nifty’s 385-point rise on Monday.

“Though the carving-out of two more mini RILs has been expected for long, rumours of an announcement grew and the stock shot up yesterday (Monday),” said an analyst on condition of anonymity.

Interestingly, huge delivery-based buying preceded Monday’s jump on the counter. Delivery as a percentage of traded value surged to 76% and 77% on 23 and 24 January, against the six-month average of 60%. In absolute terms, the counter witnessed delivery of 7.6 million shares and 8.49 million shares over the two days against a six-month average delivery of 3.69 million shares.

The stock reversed some of its gains on Tuesday as reports surfaced of a likely US strike on Iran, which is reportedly backing rebels who killed three US soldiers in Jordan in a drone attack. The profit-booking also came ahead of the 1 February interim budget and the outcome of the US Federal Reserve’s (Fed) policy meet concluding on Wednesday.

“Tuesday’s profit-booking accelerated in the second half on rising tensions in West Asia,” said Ambareesh Baliga, an independent market analyst. “Markets will closely eye the Fed commentary on its rate-cutting trajectory and any populist moves in the budget for further cues. Volatility has become the order of the day, with market impacting news flows surfacing almost daily.”

Fear gauge India Vix hit a 10-month high of 16.57 on Tuesday, up 103% from 8.18 on 23 May last year. This coincides with the market rising 17.29% over the same period, showing the gauge rises with the market testing uncharted territory and cools off when it corrects.

The market has corrected 2.7% over the past nine sessions, thanks to FPI and retail selling. The key reason for FPI sales is an increase in the US bond yield from 3.79% last month to 4.1% currently, according to Ashish Gupta, chief investment officer, Axis Asset Management Co. However, he expects yields to fall with Fed “having decidedly” turned dovish since December.

“I think the FPI selling might not sustain as US yields could correct going forward,” said Gupta.

Indeed, when the yield rose from 4.1% in August 2023 to 4.99% in October, FPIs pulled out 39,316 crore. And when they corrected between October and December, they pumped in 75,136 crore.

With yields rising this month, FPIs have sold shares worth 23,929 crore, excluding Tuesday’s provisional figure. In addition, they have shed their cumulative bullish bets on index futures as early as last Thursday and currently hold a negative 99,956 contracts ahead of the Fed policy outcome and the interim budget. On Tuesday, they net purchased Bank Nifty futures worth 271.76 crore and net sold Nifty futures worth 437.1 crore.

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