Fed effect! Indian equities follow Wall Street crash; Sensex, Nifty fall up to 1.5%

Indian benchmark indices BSE Sensex and Nifty50 witnessed sharp selling in early trade on Thursday, tracking weak cues from Asian peers and negative closing at Wall Street overnight, as the U.S. Federal Reserve's hawkish commentary triggered sell-off in global equity market. Adding to it, sustained selling by foreign portfolio investors (FPIs) and rising dollar index also injected negativity in the market.

Extending losses for the third straight session, the 30-share Sensex declined as much as 1,162 points, or 1.4%, to 79,020 in the first hour of trade so far. In three sessions, the BSE benchmark has lost over 2,000 points as investors turned jittery ahead of the U.S. Fed policy announcement.

Similarly, the NSE Nifty declined 328 points, or 1.35%, to slip below crucial level of 24,000 to 23,870. The broader market also saw surge in selling pressure with Midpacp and Smallcap indices falling up to 1%.

"When valuations are high the market needs only a trigger to correct sharply. This trigger was provided by the Fed guidance of fewer rate cuts in 2025, which went against market expectations. Even though the rate cut of 25 bp was in tune with the market’s expectation, the indication of only two cuts of 25 bp each in 2025 against market expectation of three or even four cuts spooked the market resulting in a sharp sell-off in Wall Street,” says V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Here are key factors that fuelled sell-off in the market:

Broad-based selling across sectors

All 30 Sensex stocks were flashing in red, with Asian Paints, Bajaj FinServ,  Bajaj Finance, JSW Steel, and Kotak Mahindra Bank emerging as top laggards, falling in the range of 2-4%.

Reliance Industries, the country’s most valued stock, was down 1%, while Tata Consultancy Services (TCS) was marginally lower by 0.5%.

On the sectoral front, all indices were trading in negative terrain, barring healthcare, with banking space witnessing maximum selling of 1.5%.

Hawkish Fed rate cut outlook

Investors’ appetite for risker assets such as equity soared after the U.S. central bank maintained its hawkish stance after cutting interest rate by a widely expected 25 bps to a range of 4.25-4.5%. The Fed, however, reduced the number of projected interest rate cuts for next year to 2, down from four in September policy announcement, and a likelihood of a pause in January meeting amid inflation concerns.

Weak global cues

Weighed down by the Fed policy outcome, U.S. stocks closed sharply lower on Wednesday, with the Dow falling over 1,100 points, extending losses for the 10th straight session. The Nasdaq and S&P 500 also registered their largest one-day loss in months.

Tracking overnight losses at Wall Street, the markets in Asia-Pacific region opened lower today, with eyes on interest rate decision by the Bank of Japan after its two-day policy meeting. The central bank is expected to leave its target rate unchanged at 0.25%. Japan’s benchmark Nikkei 225 declined nearly 1%, while South Korea Kospi’s declined 1.80%. Australia’s S&P/ASX 200 was down 1.4%; Hong Kong's Hang Seng index lost 1.3%, and China's Shanghai Composite fell by 1%.

Sustained selling by FPIs

The dollar index climbed above 108 and the 10-year bond yield spiked to 4.52%, which are clearly negatives from the perspective of FII fund flows. On Wednesday, foreign institutional investors (FIIs) sold equities worth Rs 6,410 crore, while domestic institutional investors (DIIs) net bought shares worth Rs 2,706 crore. For the year so far, FIIs sold equities worth Rs 2.94 lakh crore, while DIIs emerged as net buyers with Rs 5.82 lakh crore worth of shares.

Technical outlook

Anand James, Chief Market Strategist, Geojit Financial Services, says that Nifty’s slippage and close below 24260 has upped the chances of a test of 23850 pencilled in yesterday. Given the fairly soft VIX, and the fact that oscillators have not had enough time between the recent trough and the crest, in order to peak, the fall that is expected today is less likely to be sustained, he said. “Bollinger band support at 23668 and 23263 are likely to step in, if downsides get extended, but favoured view expects such drops to be brief and we should see a close back above 23850 today or tomorrow.”

Sameet Chavan, Head Research, Technical and Derivative - Angel One, says momentum suggests that the psychological level of 24000, followed by 23900, which aligns with the 200-day SMA and the 61.8% Fibonacci retracement of the recent rally, will act as key support levels on the weekly expiry day. “On the upside, resistance levels are seen at regular intervals, with yesterday’s early bounce around the 89-day EMA near 24400 marking the immediate hurdle. The broader uptrend may only resume once the index crosses 24750. With the FED policy announcement and weekly expiry on the horizon, heightened volatility is anticipated.”