Weekly wrap: Sensex, Nifty log steepest weekly fall since June 2022; what lies ahead?

This week was a dreadful for Indian equity markets, as the key indices witnessed sharp volatility, dampening market sentiments ahead of the Christmas and New Year festivities. Snapping four weeks gaining streak, the equity benchmarks Sensex and Nifty registered their biggest weekly losses in over two years as slower-than-anticipated rate cuts by the U.S. Federal Reserve triggered volatility in the global market.

The BSE Sensex and NSE Nifty lost nearly 5% this week, posting their steepest weekly loss since June 2022, as slew of other factors such as weak global cues, continued weakness in rupee, rise in bond yields, and sustained selling by foreign institutional investors (FIIs) dented sentiments. During the week, the market slipped below the 20-day and 50-day simple moving averages (SMA), and post-breakdown, selling pressure intensified. Among sectors, the metal and bank Nifty indices corrected sharply, lost over 5%, while the Pharma index outperformed, rallying over 1.5%.

The bearish outlook by the Fed is particularly impacting the domestic market, which is already contending with high valuations and low earnings growth, says Vinod Nair, Head of Research, Geojit Financial Services.

“The sell-off has been widespread, with significant declines in mid- and small-cap stocks, where valuations premiumisation is at historical peak. The IT sector is notably underperforming as it was amongst the best performers in anticipation of rapid rate cuts in 2025," he adds.

On Friday, the 30-share Sensex ended 1,176 points, or 1.49%, lower at 78,041, and the Nifty50 settled 364.20 points, or 1.52%, down at 23,587. The broader market was even worst hit, with the Midcap100 and Smallcap100 indices losing 2.8% and 2.2%, respectively. On the sectoral front, all indices closed in the red, falling in the range of 1% to 4%.

With this, the key indices erased the gains of the last four weeks as bear gripped market on all five trading days amid concerns over the U.S. Fed's policy outcome.

Ahead of Fed policy announcement, the equity benchmarks ended 0.5% lower on December 16, followed by 1.3% correction on December 17, and another 0.5% fall on December 18, in sync with global peers. On December 19, the domestic bourses saw steep fall of 1.1% in the aftermath of the U.S. Fed policy meeting, where the central bank revised its rate cut forecast for 2025 to just two from an earlier projection of four.

During this week, the India rupee breached the 85-mark for the first time against the U.S. dollar amid hawkish comment by the Fed, which pushed the 10-year bond yield to 4.56%. This rise in yields, combined with a stronger dollar, led to fund outflows of over ₹10,000 crore by foreign institutional investors (FIIs). On the economy front, goods trade deficit in November widened to $37.8 billion from $27.1 billion in October, with exports declining 4.9% YoY, while imports increasing 27% YoY.

What lies ahead for the market?

On Monday, markets will likely react to the U.S. personal consumption expenditures (PCE) data for November, a key indicator for the Fed's future actions.

“Looking ahead, Indian markets are expected to remain subdued and will closely follow global cues amidst a volatile environment. With the festive season approaching and global markets closed for 2-3 days, including a domestic holiday on December 25, market activity is expected to be low next week,” says Siddhartha Khemka, Head - Research, Wealth Management, Motilal Oswal Financial Services Ltd.

India VIX, a key gauge of market volatility, rose 9.1% this week to breach 15 level, reflecting heightened caution among traders. “With the VIX breaching the critical 15 mark, a guarded approach remains prudent, as a sustained recovery appears uncertain,” according to SAMCO Securities.

From a technical standpoint, Nifty index remains entrenched in bearish territory, weighed down by its close below the 200-day exponential moving average (EMA) and failure to reclaim the psychological 24,000 level, signalling weak buyer interest at elevated prices, says Dhupesh Dhameja, Derivatives Analyst, SAMCO Securities.

“A sustained move above 24,000 could ignite short-covering rallies, potentially pushing the index toward the 24,500 mark. Until the index confirms a breakout above resistance, a "sell on rise" strategy remains advisable. A breakdown below 23,500 could intensify selling, driving the index toward the 23,150–23,000 support zone, further reinforced by strong put writing,” he adds.