Expectations of a festive rally on Dalal Street have been dashed, as the US Federal Reserve’s hawkish commentary on future rate cuts has spooked markets. India’s equity benchmark indices – the BSE Sensex and NSE Nifty – recorded their steepest weekly declines in over two years, plummeting nearly 5 per cent each.
This week’s crash erased almost all the recovery seen between November 21 and December 13, following two months of relentless selling. The Nifty fell by 4.5 per cent (1,150 points) over the week, while the Sensex dropped 4.8 per cent (3,933 points).
On Friday, the Sensex closed 1,176.46 points (1.49 per cent) lower at 78,041.59, and the Nifty fell 364.2 points (1.52 per cent) to 23,587.50.
Investors bore massive losses, with the market capitalisation of BSE-listed firms shrinking by Rs 18 lakh crore this week, falling from Rs 460 lakh crore to Rs 442 lakh crore. On Friday alone, Rs 9 lakh crore was wiped out.
The sell-off was triggered by the Fed’s cautious stance on rate cuts, now projecting just two rate cuts in 2025 instead of the earlier estimate of four. This shift in policy has impacted global equity and bond markets, with rising US bond yields weighing heavily on global currencies, including the Indian rupee.
Additionally, the spike in yields has led to increased selling by foreign institutional investors (FIIs), adding further pressure on domestic equities.
“Nervousness continued to grip investors and stocks across-the-board went into a tailspin as the dollar's continuing strength against the rupee has been prompting foreign investors to flee local equities and take shelter in safe haven dollar assets,” said Prashanth Tapse, Senior VP (Research), Mehta Equities.
Tapse added that investors are also apprehensive about Trump's trade policies when he takes charge in mid-January next year, as his aggressive policies could further roil the global market.
FIIs have reversed their buying spree from earlier this month, selling (net) about Rs 16,000 crore worth of Indian equities over the past five sessions.
“The strong US dollar and robust US economy are diverting funds away from emerging markets like India. With the 10-year US yield at 4.52 per cent and sluggish earnings growth in India, FIIs currently lack compelling reasons to invest here,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
He added that FIIs may return once the dollar stabilises, but near-term flows remain under pressure.
Besides the chances of fewer rate cuts, concerns related to India's macroeconomic health have added to the pressure. The country's trade deficit widened to an all-time high in November and the second quarter GDP came to the lowest in nearly two years.
All major sectoral indices on the NSE suffered losses on Friday. Nifty Realty fell 4 per cent, while PSU Bank and IT indices plunged almost 3 per cent each. On weekly basis, the IT index fell 4.4 per cent, Capital Goods declined 5 per cent, and Power plunged 5.2 per cent.
In the broader market, the mid and small stocks fell sharper than the blue chips. The BSE Midcap and Smallcap indices dropped 2.43 per cent and 2.11 per cent, respectively, on Friday.