The Sensex plunged over 400 points in an unexpected turn of events Tuesday. The sharp fall was contrary to expectations of many analysts, who believed that the deferment of the General Anti Avoidance Rule or GAAR by one year will result in upsides for equities.
Here are five reasons why markets fell sharply today. (Read:Nifty ends below 5,000 for the first time since January 18)
1) The selloff was led by stocks that carry large weight on the benchmark indices. Seven of the 30 stocks listed on the Sensex - ITC, TCS, HDFC Bank, L&T, Tata Motors, ICICI Bank and SBI - contributed over 250 points to the 367 points the Sensex lost today. Small cap and midcap indices fared better than the benchmark Sensex.
2) Markets are trading in a bear territory. The Nifty failed to close above the 200 day moving average despite a dramatic recovery yesterday. The 200 DMA is a strong support for stocks or indices. The next big support was at 5,040 which the markets breached today.
"We have entered below the downward sloping channel, which is a bearish sign for markets. The short term and medium term remains negative. 4,950 is the first support for the Nifty now," Somil Mehta of Sharekhan told NDTV Profit.
3) Foreign institutional investors continue to sell equities in the Indian markets. Yesterday, FIIs sold stocks worth Rs 631 crore, even though Finance Minister Pranab Mukherjee announced the deferment of GAAR by one year.
"FIIs sold yesterday and that might be an indication that in spite of FM's provisions, people are forming a view that they need to sell out," Lancelot D'Cunha, CEO at Sharyans Wealth Management told NDTV Profit today.
4) Confusion over GAAR remains: On Monday, Mukherjee announced a committee to give recommendations for formulating the rules and guidelines for implementation of the GAAR provisions and to suggest safeguards so that these provisions are not applied indiscriminately. This Committee will submit its recommendations by 31st May 2012.
Analysts say the committee has been given little time to come up with recommendations. "Within a month if you are going to give the report... it means something is ready and you are coming out with that under the GAAR committee's recommendation. India is a vast country, one month's time is nothing, the finance bill itself will take another 4-5 days to pass by the President's sign," TP Ostwal, managing partner of TP Ostwal & Associates told NDTV Profit.
Domestic brokerage firm Religare said GAAR deferment gives marginal relief to investors. The changes proposed here partially address some of the concerns raised by investors in the FY13 Union Budget, it added.
5) Macro headwinds persist: The rupee continues to be weak, current account deficit is unsustainable, and major reform processes are still stuck. "Strong measures are required to rectify and bring the economy back on track," Mukherjee said while replying on the Fiscal Bill debate in Parliament today.
The relief rally could continue for a bit aided by GAAR deferment but economic growth & investment cycle need to be revived for sustained rally, investment bank JP Morgan had said yesterday.