Investors lose Rs 10.5 lakh cr as markets see sharp sell-off amid US Fed concerns

Indian equity markets faced a turbulent week, with the benchmark indices Nifty 50 and Sensex tumbling for four consecutive sessions, erasing Rs 10.5 lakh crore in investor wealth. The Nifty 50 fell below the 24,000 mark, settling at 23,952 on 19 December, a decline of 247 points or 1 per cent.

Similarly, the Sensex plunged by 964 points, closing at 79,218, marking a 1.2 per cent drop. Over the past week, both indices registered a loss of more than three per cent, reflecting heightened market volatility driven by global and domestic factors.

The dollar index soared to a two-year high, intensifying pressure on emerging market currencies, including the Indian rupee. Already weighed down by slowing economic growth, volatile equity flows, and a strengthening dollar, the rupee is now further challenged by a record-high trade deficit.

The US Federal Reserve's latest monetary policy outlook emerged as a key trigger for the sell-off. Despite reducing the benchmark interest rate by 25 basis points to 4.25-4.5 per cent, the Fed's hawkish tone on inflation and its forecast for only modest rate cuts in 2025 unnerved investors.

The central bank revised its inflation estimate for 2025 to 2.5 per cent, up from the earlier projection of 2.1 per cent. This cautious approach unsettled markets that had anticipated a steeper easing cycle.

Federal Reserve chairperson Jerome Powell, meanwhile, spoke of the institution's commitment to economic stability, but warned that achieving the 2 per cent inflation target could take one to two years. As Ravi Singh, SVP of retail research at Religare Broking, explained, “The forward guidance surprised markets, with Powell indicating expectations for two additional cuts in 2025.”

The global impact of the Fed's policy stance was immediate. Major markets, including Japan, South Korea, Hong Kong, and China witnessed significant sell-offs, dragging Indian indices along. The ripple effect extended to domestic foreign institutional investor (FII) activity, with FIIs offloading Rs 8,000 crore worth of holdings over three sessions.

This added to the cumulative net selling of Rs 2.94 lakh crore by FIIs this year, sparking fears of another prolonged outflow phase. Additionally, the Indian rupee weakened further, closing at a record low of 85 against the US dollar.

The dollar index, a measure of the greenback's strength against a basket of six currencies, reached a two-year high of 108.3, while the US 10-year bond yield climbed to 4.45 per cent, exacerbating concerns about liquidity.

Sectors sensitive to interest rates bore the brunt of the sell-off. Banking, real estate, and technology stocks recorded significant losses, with Infosys and LTIMindtree among the worst hit. The tech sector, heavily reliant on US exports, felt the impact of rising bond yields and a stronger dollar, which increase the cost of services for US clients and dampen demand.

Meanwhile, defensive sectors like pharmaceuticals outperformed, as investors sought refuge in relatively stable bets. Prominent pharma stocks, including Dr Reddy’s Labs, Cipla, and Lupin, rose 1-4 per cent, with others such as Laurus Labs and JB Pharma posting gains of up to 5 per cent.

The broader market indices showed more resilience, with the Nifty Midcap 100 and Smallcap 100 declining by 0.3 percent and 0.5 percent, respectively. However, three Nifty 50 constituents — Nestlé India, Asian Paints, and IndusInd Bank — hit 52-week lows, collectively erasing Rs 2.2 lakh crore in market capitalisation.

Experts believe that while the Fed's measured approach and FII outflows have contributed to near-term volatility, the long-term implications may be limited.

Vinod Nair, head of research at Geojit Financial Services, noted that sectors like banking and real estate remain under pressure, while defensive plays in pharma have offered a silver lining. Similarly, V.K. Vijayakumar, chief investment strategist at Geojit, remarked that the rise in the dollar index and bond yields could dampen FII flows temporarily but are unlikely to derail market fundamentals.

As markets navigate these global and domestic headwinds, investors remain on edge, closely monitoring developments in the US and their potential impact on Indian equities.