BSE Sensex Slumps Below 27,000: Should You Worry?

On Tuesday, the BSE Sensex extended its losses for a fourth session , dropping as much as 583 points to an intraday low of 26,736. It ended down 538 points to close below the key 27,000 level for the first since October 28. The 30-share Sensex has shed over 1,950 points in December, a drop of nearly 7 per cent in just 12 sessions. The 50-share Nifty has given up over 500 points in this month. Here are the reasons why Indian markets have lost some lustre in December:

1) Worldwide, equity markets have come under pressure because of rising concerns about global growth. The economies of China, Japan and Europe appear to be weakening. This has partly led to a crash in crude oil prices. Markets with big energy companies have faced a rout over the last few days.

2) Equity markets tend to come under pressure when the currency starts to weaken. On Tuesday, the rupee hit a 13-month low of 63.59 against the US dollar. The sharp fall came after the Russian central bank hiked interest rate to 17 per cent from 10.5 per cent earlier on Tuesday. Russia's move is aimed at attracting foreign funds and may pressure emerging market currencies like India. 

3) India has been the best performing emerging market in 2014 on the back of foreign flows, which have totaled nearly $40 billion year-to-date. However, foreign institutional investors have sold shares in the cash market for the last five sessions. The recent selloff is not unusual because foreign players usually book profits in December.

4) Indian markets tend to fall every time the US Federal Reservemeets to discuss its policy. The Fed will decide tomorrow when it intends to raise interest rates. A hawkish announcement will be detrimental for global stock markets, including India.

5) Sentiments in the domestic markets have been hit because of weak data points. Industrial output contracted in October, its worst performance in three years. This has raised fresh concerns about recovery in domestic growth. 

6) Tuesday's selloff came on account of a sharp fall in rate sensitive stocks, which have come under pressure on fears that the Reserve Bank may not be able to cut rates quickly given the slump in the rupee. A reduction in rates could trigger foreign outflows, piling up pressure on the rupee, analysts say. 

7) Much of the selloff in December has resulted from a correction in IT stocks. Frontline tech stocks such as Infosys and TCS, which have large weightage in the Nifty, have fallen over 10 per cent this month on fears that rising dollar will hurt revenues in other currencies. 

8) A selloff in energy stocks, especially those with large index weightage such as Reliance Industries, also weighed on broader markets. Energy stocks have fallen on fears of eroding profitability because of the slump in crude oil prices.

Are there reasons to worry? Despite recent correction, the BSE Sensex is up 27 per cent year-to-date. Analysts say some correction or consolidation is always good for markets as it helps create a base for the next up move. Foreign investors, who play a big role in deciding the fate of Indian equities, continue to be bullish about India, analysts say.