Indian stock market were under severe selling pressure in July because of worries over a slew of budget proposals and a further slowdown in the economy. The benchmark index Sensex was down 4.86% and the Nifty slipped 5.69% in July, the sharpest monthly decline since October last year.
This is worst performance of stock markets in July in 17 years. In July 2002, the Sensex had fallen 7.92%.
It was worse for smaller companies—BSE Midcap and BSE Smallcap indices were down 7.87% and 10.87% respectively in July.
Analysts are worried about market weakness because of tightening credit supply, weakening business sentiments, weaker investment cycle, and slowing global growth.
Foreign institutional investors rattled by the Union budget proposal to increase the surcharge on super rich tax payers were net sellers in July to the tune of $1,623.13 million. However, domestic institutional investors, including mutual funds and insurance companies, were net buyers of Indian shares worth ₹17,915.14 crore.
The sharp decline in markets was despite favourable factors like the currency and crude. In July, the rupee was up 0.34% and crude prices were down 2.15%.
“There were no big bang reforms or any major stimulus in the Union budget. On the contrary, the increase in surcharge and the proposal to raise public shareholding from 25% to 35% have dampened investor sentiment and led to a sharp correction post budget,” said Rusmik Oza, head of research, Kotak Securities Ltd.
The major concern for the markets is the serious slowdown seen in various sectors that seemed cyclical at the start but are turning out to be structural in nature, according to Oza. Tough economic reforms are needed to reverse the current slowdown, he said.
“Consumption-led growth and high government spending could be running out of steam and we are not seeing any revival in private investment. The slowdown in consumption largely reflects moderate growth in household income and higher taxes on households,” he said.
Elusive corporate earnings growth, which may indicate that the markets were running ahead of fundamentals in May, has added to the sluggish environment. Aggregate net profit growth of 281 BSE-listed companies excluding banks, financials, oil and gas companies that have reported June quarter results showed that profit growth has slowed to 8.49% from 23.8% a year earlier after adjusting for one-time gains or losses, according to a Mint analysis. Net sales growth slowed to an at least 13-quarter low of 5.07% from 20% in the same period last year and 10.27% in the preceding March quarter.
Nifty earnings have grown at a CAGR of 3% in the last five years. There could be some meaningful cut in earnings, going by the June quarter results reported so far, analysts said.
“The narrative of a slowing economy, poor earnings and a simmering NBFC crisis is front and centre. Yet, we think the Indian market is simply giving up the outperformance it earned in May, upon the publication of the exit polls. The Budget in early July, that was devoid of any major ‘stimulus’, seems to have catalysed the reversal . This is largely over,” said Bank of America Merrill Lynch. Analysts feel the performance of the markets will depend on a lot of factors including the US Federal Reserve’s action and commentary on the global economy.