Mumbai: On Monday, India’s stock market experienced a significant downturn, with investors collectively losing ₹3.79 trillion. This decline marks the steepest single-day fall in nearly two months, predominantly driven by aggressive sell-offs by foreign portfolio investors (FPIs) and retail clients.
The Nifty index decreased by 1.41%, settling at 25,810.85, while the Sensex dropped 1.49% to reach 84,299.78. This decline is noteworthy as it accounts for the largest drop since August 5, when both indices witnessed a drop of approximately 2.7% each.
The market slump was prompted by mixed global cues and the unwinding of overbought positions, primarily affecting large-cap stocks in sectors such as energy, banking, and automotive. Key contributors to the Nifty’s decline included major players like Reliance Industries (-74.72), ICICI Bank (-50.13), HDFC Bank (-35.64), Axis Bank (-26.44), Infosys (-24.33), and Mahindra & Mahindra (-16.72).
The impact of these heavyweights on the Nifty can be explained by their respective weightings; stocks with higher weight classes contribute more substantially to the movements of the index.
Contributing global factors that led to the market’s downturn included speculation regarding potential redirection of foreign fund flows toward China, escalating tensions in the Middle East—which could elevate crude oil prices—and the appreciation of the Japanese Yen.
“The expectation of increased foreign portfolio flows to China, following substantial stimulus measures announced last week, could divert foreign investments away from overbought markets like India,” remarked Swarup Mohanty, vice-chairman & CEO of Mirae Asset Investment Managers (India).
The blue-chip Nifty and Sensex indices both fell below the critical psychological thresholds of 26,000 and 85,000, respectively, in light of these market conditions.
Notably, the drop was somewhat offset by notable purchasing activity from domestic institutional investors (DIIs), who bought shares worth ₹6,645.80 crore. In contrast, provisional data indicated that foreign institutional investors net sold ₹9,791.93 crore—this being the highest level of selling seen in four months.
To provide context, FIIs had net investments of ₹1 trillion and DIIs net invested ₹3.34 trillion throughout the calendar year, based on exchange and depository records as of September 27.
The broader market indices, however, demonstrated resilience, with the Nifty Smallcap 250 inching up by 0.06% to 18,410.7, while the Nifty Midcap 150 experienced a minimal decline of 0.2%, closing at 22,311.95.
Investors remain cautious as market experts predict increased volatility in the coming sessions, albeit they maintain a structural bullish outlook for India’s economy.
“This pullback is necessary and aligns with our expectations in the wake of the budget announcements from July 23. We are noticing a rotation from overbought sectors such as railways and defense manufacturing, shifting towards healthcare, private banking, and consumer discretionary sectors,” stated Mohanty.
The decline of the indices occurred alongside declines in other global markets, with Japan’s Nikkei 225 falling by 4.8%, South Korea’s Kospi down by 2.13%, and Taiwan’s Taiex dropping by 2.6%.
In contrast, China’s CSI 300 blue-chip index surged by 8.48%—the most significant increase seen in 16 years—driven by a 20 basis point rate cut and an extensive fiscal stimulus totaling $284.43 billion. Notably, Chinese stock markets will close for a week starting Tuesday due to the Golden Week holiday.
Heavyweights in Overbought Territory
The technical indicators suggest that many Indian blue-chip stocks are currently in an overbought state, as evidenced by the Nifty’s monthly relative strength index (RSI), which reached a 17-year high of 83.92 on Friday. This RSI figure has not been seen since October 1, 2017, when it peaked at 85.77.
The RSI, a metric that helps determine overbought or oversold levels for stocks and indices, ranges from 0 to 100, where values above 70 indicate overbought conditions and below 30 suggest oversold conditions.
“Following Monday’s pullback, the RSI adjusted to 83.19, which remains indicative of multi-year highs,” noted Jay Vora, a market analyst with IndiaCharts.
According to Vora, as long as the Nifty maintains a level above the 20-day simple moving average of 25,479, there is potential for growth towards new highs following this correction, possibly pushing the RSI even higher.
Derivatives Indicating Volatile Times Ahead
The Nifty futures contract, expiring on October 31, saw a provisional open interest (OI) decline of 6.9%. This, combined with the decrease in the spot Nifty, reflects bearish sentiment in the short term.
Similarly, the Bank Nifty futures contract, set to expire on October 30, observed an increase in provisional OI by 1.7%. This is interpreted as a bearish signal as it coincides with a decline of 1.59% in the Bank Nifty sectoral index, which fell to 52,978.10. An increase in OI alongside a decrease in prices suggests bearish market sentiment.
Among the 16 sectoral indices, only the metals and media sectors finished the day in the green, showcasing the selective nature of the market correction.
Despite bearish signals across derivatives, various market experts, including Dhiraj Sachdev, CIO of family office fund Roha Venture, express optimism: “Such pullbacks can be beneficial. I believe that any selling from foreign institutional investors will likely be absorbed by domestic institutions, sustaining overall market stability.”
