Rising geopolitical tensions, spike in crude, consistent selling by foreign institutions, soaring global inflation, anticipation of a Fed rate hike and a large LIC IPO on the cards that seeks to drain liquidity from markets were some of the reasons attributed by market participants for the massive fall of Indian equities on Bloody Monday. The Sensex tanked 1,747 points, or 3%, while Nifty 50 fell 531 points. The most appalling fall was that of Bank Nifty, the largest part of Nifty index, that slid over 4%, or 1,608 points.

“Right from geopolitical tension to spiking crude, everything that you can think of going against equities is right now on display,” Sanjay Singh, CEO, BNP Paribas India, tells Fortune India the Monday market drag provided all the textbook reasons for fall.

However, Singh opines Indian equities are in a better shape than European or American equity markets. “Market may move in the range of 16,000 to 18,000 for next few weeks and I don’t see much downside beyond this range as investors will jump in if it goes below 16,000.”

Analysts say U.S. government’s warning to American citizens about Russia’s anticipated attack on Ukraine was the prime driver for market fall on last week’s Friday. The same threat is now filtering into Asian and European equities.

Role of foreign institutional investors

Over one-fifth of the Indian stock market is owned by foreign institutions, hence any directional bets taken by these institutions are keenly followed by market participants. Since the beginning of this year, FIIs are selling heavily. As per the NSDL website, foreign institutions have sold over ₹43,000 crore worth of equities in this calendar year. In February, FIIs have sold Indian shares worth ₹9,729 crore while in January they sold equities worth ₹33,303 crore. For the record, on the back of subprime crisis, FIIs had sold Indian equities worth ₹52,987 crore in 2008 and that leads to massive correction in Indian market,

As per Greed and Fear Report by Jefferies dated February 10, foreign portfolio investors (FPIs) are net sellers in Indian equities. In the December quarter the overall market ownership of FPIs in BSE 500 stocks declined by 0.9% to a seven-quarter low of 20.7%, the report states.

Moot point is why FIIs are selling in the Indian equity market? Harendra Kumar, managing director, Elara Securities India, says FIIs are taking back some of the profits as India is relatively expensive in relation to other emerging markets.

Amish Shah, head of India research at Bank of America Securities, concurs with Kumar's view. He says the Indian market is currently trading at a premium to emerging markets and even on a historical level the premium is high. MSCI India’s 1 year forward PE is currently at 24 times versus 13 times for MSCI Emerging Markets, implying a premium of 88%. This premium is on the higher side versus its historical average of 46%.

Fed hike fever

The U.S. Federal Reserve is behind the curve as U.S. inflation of 7.5% now exceeds Mexican inflation of 7.1% which is rare, especially when the Fed policy rate is 0% while Banco de Mexico policy rate stands at 5.5%, writes Michael Hartnett, chief investment strategist at Bank of America, in a research note published last week.

The big losses in emerging markets, long duration tech stocks and cryptocurrencies are hinting that the party is now ending. The recent surge in two-year treasury yield to 1.6% (above pre-Covid-19 levels) on inflation shock and rates shock has coincided with a massive reversal of QE exercise, which Fed has decided to end by next month.

Taking note of the rise in bond yields in the U.S. market, many foreign investors are selling emerging market equities and pouring money into U.S. fixed income.

LIC IPO - Elephant in the room

On Sunday night, insurance giant LIC filed the draft red herring prospectus (DRHP) for its initial public issue. It is expected that LIC will come out with an IPO next month. While the amount that the company seeks to raise is not mentioned in the DRHP, market participants believe that it is close to ₹70,000 crore. As per the DRHP, the government is divesting 5% of total equity by offering 31.62 crore shares to the public.

The retail quota is fixed at 35% while taking into account the quotas fixed for policyholders and employees, it is believed that the company is offering around 13 crore shares to retail investors belonging to these 3 categories. Many of the retail participants are selling some portion of their portfolio to arrange money for LIC IPO, according to an analyst.

Not only retail investors but also domestic institutions are selling some parts of their portfolios to make room for LIC IPO. Seeing the consistent selling by FIIs, it seems not many foreign investors will subscribe to the LIC IPO. If it happens then the burden to make LIC IPO succeed falls on the shoulders of DIIs, says the CEO of a mutual fund who chooses to remain anonymous.

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