The 10% drop in the volatility index or VIX to 20.61 from 23-plus levels during the day reflected the relief among investors. But money managers warned against building up expectations of a sustained rebound as concerns over aggressive rate hikes by the US Federal Reserve will keep the market jittery.
The Nifty gained 510 points or 3% to close at 17,352.45, up from sub-17,000 levels in the previous session. The Sensex ended 1,736.21 points or 3% higher at 58,142.05. Both indices had plunged 3% on Monday – the biggest single-day loss in 10 months.
“It is difficult to judge whether Russia will attack or not attack but this is a critical event from a market sentiment perspective,” said Vinit Sambre, head of equities at DSP Investment Managers.
“The worry about interest rate hikes and tapering will have its own bearing, with people still debating about the number of hikes they expect,” said Sambre.
In Asia, the Nikkei 225, Hang Seng, Kospi and Taiex ended down 0.2-0.8% while the Shanghai Composite gained 0.5% and the Singapore’s Straits Times ended flat. European markets were firm after the reports of Russia calling back troops, with benchmark indices in France, Germany and UK 0.7-1.8% higher mid-trade. The Stoxx Europe 600 was up 1.3%.
Bank of America Securities Tuesday slashed its target on the Nifty for December to 17,000 from 19,100, citing the likelihood of faster interest rate increases by the Fed. Bajaj Finance, State Bank of India, Bajaj Finserv, Larsen & Toubro and Titan rose 4-5%, ending as the top gainers on the Sensex.
“While there was a Covid-led disruption, the environment was conducive for equities due to liquidity which pushed markets way above their fundamentals,” Sambre said. “The side effect of liquidity is now seen in the form of inflation, which needs to be addressed by tightening and raising interest rates. This will hurt equity valuations further.”
Foreign portfolio investors (FPIs) sold Indian shares worth Rs 2,298.8 crore on Tuesday while domestic institutional investors (DIIs) bought stocks worth Rs 4,411.6 crore.
Russia said Tuesday some of its military units were returning to their bases after exercises near Ukraine, resulting in Brent crude futures declining 2.85% to $93.73 a barrel. On Monday, crude rose to $96.16, the highest since October 2014, because of fears that an invasion of Ukraine by Russia could lead to sanctions by western powers.
The selloff on Monday had pushed the Nifty closer to breaching its 200-day moving average, a long-term technical indicator. An index or stock going below that level usually means a tighter bear grip.
Analysts said the market was also oversold after the recent spate of exits by foreign investors over the past month, with outflows being triggered first by a hawkish turn in Federal Reserve’s monetary policy. The subsequent monetary policy review earlier this month and four-decade high inflation print in the US in January cemented the market’s fears of a higher quantum of rate hikes beginning March. With foreign investors overweight on the local market, which has more than doubled from March 2020 lows, India has been ripe for profit-taking.
“We are back to square one where the market adjusts to normalisation of liquidity and rates which will mean that markets could continue to remain volatile,” said Vinod Karki, equity strategist at ICICI Securities. “As liquidity normalises, easy money will not be available for extremely expensive growth areas including unicorns. I am not seeing cracks in earnings despite the surge in inflation going by Q3FY22 numbers as they were largely in line but since yields are rising, one can expect that equity returns will be capped.”