Indian benchmark indices ended with over 2% losses on Monday, biggest single day decline in three months, amid high volatility. The BSE Sensex ended at 38,628.29, shedding 839.02 points or 2.13%, while the Nifty closed at 11,387.50, losing 260.10 points or 2.23%.
Implementation of new margin norms from 1 September, clashes between India and China along the Himalayan border, anticipation of a sharp contraction in thgross domestic product in June quarter, highest number of covid-19 cases being recorded in a day and concerns of the virus spreading to rural India – all contributed to the fall in overall markets according to analysts.
Shares in Asia Pacific were mixed with markets in Japan leading the gains. Markets in China, Hong Kong and Korea ended lower.
“There are multiple news flow with respect to the market meltdown in today’s trade as the larger indices like Nifty 50 and Bank Nifty were trading at resistance levels so minor profit booking was expected but the news flow of geo political concerns between India and China added to the negative sentiments, new rules of margin implication can have a dent in volumes in the immediate term,” said Vikas Jain, senior research analyst, Reliance Securities.
As the geo-political tensions and uncertainty escalated, Indian volatility index or VIX spiked 27% to end at 23.32. Rise in the fear gauge indicates that fear and anxiety have increased in the markets. India VIX had cooled off drastically from the March highs and was hovering around six-month low last week. The VIX had fallen over 70% from the highs of 86.64 touched on 24 March when stock markets had crashed over 10% in a single day. The India VIX index shows investors perceptions of volatility and expectation of the markets for at least a month ahead. The volatility index typically has an inverse correlation with the benchmark indices. The VIX at elevated levels indicates investors expect a major correction at least over the next month and vice versa.
Cash market volumes crossed ₹1 lakh crore mark for the first time in India. “Its driven by factors like strong retail participation, MSCI re-balancing and technical reasons e.g. intra day square off by retail investors due to new margin norms in effect from 1 Sep 2020. Bank Nifty Future too has seen the highest volume of 1.24 crore shares today. There may be small drop in the vol. due to new margin norms but eventually market tends to get used to it with new system,” Hemang Jani, Head – Equity Strategy, broking and distribution, Motilal Oswal Financial Services said.
However, domestic liquidity is drying up in Indian equities while foreign fund flows continue as stock markets are seeing a robust rally. In August, domestic institutional investors (DIIs) including mutual funds, insurance companies and banks have remained net sellers in equities for second consecutive month. DIIs sold ₹11727.66 crore shares in August, highest ever sell-off since March last year. continuous flooding of foreign money into Indian equity has taken the net inflow by FIIs at $6.35 billion in August after a net purchase of $1.15 billion previous month. This is FIIs’ highest purchase of Indian shares since September 2010 when there was a net inflow of $6.37 billion. In the year so far, FIIs have bought Indian shares worth $5.06 billion,