Tuesday’s selloff signals pain in Indian stocks may intensify

The domestic equities would see another painful selloff on Tuesday was something widely speculated by the market fraternity over the weekend. The reason? There was no positive signal about any short-term measure from the government to sort out the income-tax surcharge issue at Friday’s meeting between Finance Ministry officials and FPI representatives.

Sentiment changed on Monday, a market holiday due to Id-ul-Adha, as India’s largest private sector company Reliance Industries announced a mega deal to sell a 20 per cent stake in its oil-to-chemicals business to Saudi Aramco, one of the largest companies in the world by revenue.

Plus, Chairman Mukesh Ambani also set a 18-month deadline to make RIL net-debt free. Over the past month, concerns over rising debt and negative free cash flow had shaved off around 9 per cent from the stock, which has the second largest weightage in benchmark Nifty50 at just over 8 per cent.

RIL opened Tuesday’s trade with a gap up of more than 7 per cent, a rare event in the stock’s trading history, but Nifty slipped from the word go, clearly signalling deep trouble. And through the day, the selloff was so intense that a stellar 9.72 per cent rally in RIL shares failed to hold Nifty from logging one of its biggest one-day drops this year.

While long positions got unwound in the early part of the session, the pain exacerbated as the day progressed, as Asian markets started to slip on growing protests in Hong Kong, a crash in the Argentine peso and mounting doubts over a possible global slowdown.

Dow Jones futures traded with strong cuts and bond yields dropped sharply, indicating a possible global economic slowdown. Political worries in Argentine and Italy also triggered risk aversion. While Italy’s ruling coalition has splintered, forcing a confidence vote and elections, in Argentina, stocks and government bonds crashed after President Mauricio suffered a surprise defeat in the primaries, raising worries that a protectionist government might take power.

Dalal Street, though, has more to worry about the FPI selloff. On Tuesday, largecaps like Bajaj Finance, L&T and HDFC – stocks that were helping Nifty outperformance till a couple of months back – all witnessed selling. As retail ownership on these counters is not very high, such across-the-board selloff in these stocks clearly signalled institutional selling.

As such stocks tend to remain under pressure for longer periods after a bout of major selloff, Tuesday’s selling signalled pain for a few more days to come.

Plus, if IT and pharma stocks, which are exposed to the US economy but have managed to hold their heads above water so far, now come under selling pressure, it could perpetuate the selloff in Indian equities for a longer duration.