Markets fall due to RBI’s move to cut liquidity, Morgan Stanley downgrades

The Sensex ended down 1.89% or 1158.63 points at 59,984.70, while the Nifty fell 1.94% or 353.70 points to end at 17857.25. Both the Sensex and Nifty indices saw the biggest fall since April 30. In the intraday, the benchmark Sensex lost about 1365.75 points while the Nifty fell 411.50 points.

Most Asian markets also fell on Thursday amid concerns that recovery from the pandemic would slow as high inflation tightened monetary policy. Japan’s Nikkei was down 1%, while the Hang Seng was down 0.3%. The expiry of monthly derivatives contracts on Thursday also added to the losses in the market.

The RBI on Wednesday announced its 7-day and 28-day variable rate reverse repo auctions, valued at Rs 1.5 trillion and Rs 50,000 crore respectively, to be held on November 2. The deployment of long-term operations (28 days) will be the first time since the move was flagged off by RBI Governor Shaktikanta Das in the October 8 policy.

“This increase reinforces the central bank’s woes with additional liquidity and changes strategy to address surfits on a more sustainable basis through long-term VRRR auctions. This increase is another incremental step in the reverse repo rate. Which we suspect will happen in two phases, and will start as the December meeting, said Radhika Rao, economist at DBS Bank.

The move highlights the RBI’s concerns over excess banking cash, which is still over Rs 7.5 trillion, and could turn into inflation. The long-term reverse repo could also be aimed at managing a possible liquidity squeeze due to the slate of initial share sales in the coming weeks.

Nykaa owner FSN plans to grow E-commerce Ventures ₹5320 crore while Paytm will raise approx. ₹18,300 crore through its initial share sale early next month.

Investors appeared worried even after two foreign brokerage firms downgraded India’s ratings, citing concerns over costly valuations.

Morgan Stanley has upgraded the Indonesian market to overweight status to equal weight India. “While fundamental leading indicators are positive, we view valuations as increasingly limited returns over the next 3-6 months, particularly as we move toward Fed tapering, absorbing the impact of higher energy costs and easing the cycle. Let us absorb our expectations of RBI’s first hike for February 2022,” said a Morgan Stanley report.

“Despite already rapidly advanced consensus earnings through 2021, India’s 12-month forward P/E ratio has moved to an all-time high of 24.1x. As a result, India is the most expensive in our model on the EM-relative The market is. 5 year past Z-score of P/B and P/E. We believe it may relieve the index from here and look for some consolidation, our India strategy team technology and Consumers prioritize discretionary and financial while avoiding health care, said the Morgan Stanley report.

On 25 October, Nomura overweight neutralized Indian markets due to higher valuations due to unfavorable risk-reward, as many positives seem to be priced in while headwinds are emerging. Instead, the Japanese brokerage firm prefers China and ASEAN and will look for better entry points to India.

On 20 October, UBS said it has an underweight rating on India, calling it “extremely expensive”. UBS strategists believe that Indian stocks are the least attractive in the market as valuations are rising with declining earnings momentum, while there is little room for economic recovery this year.

Ajit Mishra, VP – Research, Religare Broking said, “This fall in the index has derailed the recent recovery and we may see further downside in the next sessions. We reiterate our cautious outlook on the markets and restrict leverage positions. suggest doing.”

Foreign institutional investors have net sold Indian equities worth $1.47 billion in the last five sessions. Overall, FIIs are net sellers of equities worth $970.82 million so far this month.

Bloomberg contributed to this story