On Friday, the Dow Jones fell by 1.5 per cent, and the Indian markets fell by more than 1 per cent.
Last Wednesday, the US Federal Reserve, while holding rates steady, signaled a shift in approach. The change in the tone of the commentary — from being fixated on inflation to being “attentive to the risks to both sides of its dual mandate” of inflation and employment — had raised the possibility of an interest rate cut at the Fed’s September meeting. The Dow Jones index rose in anticipation of a policy pivot. However, subsequent data released by the US Bureau of Labour Statistics raised concerns over the state of the economy and posed the question: Was the Fed being too slow to act? Non-farm payrolls increased by 1.14 lakh in July, significantly below market expectations and the unemployment rate rose to 4.3 per cent. This has raised fears of a deterioration in the labour market, and the possibility of a recession. The labour market data has roiled global markets, and India is no exception.
On Friday, the Dow Jones fell by 1.5 per cent, and the Indian markets fell by more than 1 per cent. The fall intensified on Monday. The BSE Sensex plunged by 2,393 points or 2.95 per cent during the early hours of trade. The Sensex ended the day down 2.74 per cent. The BSE Midcap also fell 3.6 per cent, while the small cap index was down 4.21 per cent. The Nifty VIX, a measure of volatility, rose by a staggering 42.2 per cent, indicating investor nervousness. Other Asian markets were also in the red. The Nikkei fell by 12.4 per cent and Kospi by 8.77 per cent. European markets — the DAX and the FTSE — also opened in the red. US stock futures tumbled as the sell-off pressure intensified. Global markets have been wary of risks stemming from the Bank of Japan raising interest rates and fears of the conflict escalating in the Middle East.
While the immediate triggers for the fall appear to be largely external, for some time now there have been concerns over valuations in parts of the Indian stock market, especially the small and midcap segments. A recent report by Kotak Institutional Equities had said that the market “continues to be a mix of optimism and euphoria”. In the near term, besides the global factors, domestic factors — the RBI’s monetary policy committee meeting this week, and the release of economic data subsequently — could also have a bearing on the market’s trajectory.
