Fed sneezes, Indian stocks go cold

Desperation engulfed global markets on Thursday after the US Federal Reserve signaled a slower rate cut, sending Indian shares lower for a fourth day in a row. Markets are now awaiting the start of the annual Santa Claus rally, when stocks tend to rise during the Christmas and New Year holidays.

While the Fed cut the US policy rate by 25 basis points, it indicated that it could cut rates twice in 2025, instead of four times as previously forecast. The Nifty and Sensex fell in line with global peers as foreign investors dumped domestic blue-chip stocks. The Fed’s cut in interest rate forecasts strengthened the dollar, dragging the rupee below 85 per dollar to a new low.

The Nifty closed below 24,000 and settled 1.02% lower at 23951.70, while the Sensex closed below 80,000 and fell 1.2% to 79218.05. There were intense selling on the day in banking, technology and oil and gas, heavyweight sectors where foreign portfolio investors (FPIs) have a significant presence.

Bearish undertone

The market undertone remains bearish, with domestic indices likely to take cues from their global peers, although analysts have not ruled out a recovery after four straight days of consecutive declines.

“This (decline) is in response to the Fed’s comments,” said Deepak Jasani, head of retail research at HDFC Securities. Jasani expects Indian markets to witness a Santa rally next week after the recent rout. “FPIs will head out for their Christmas and New Year holidays from next week, and the market will experience some respite with domestic investors at the helm amid low volumes,” Jasani added.

FPIs sold shares worth a provisional amount ₹4,224.92 crore on Thursday, with domestic institutional investors buying net ₹3943.24 crore worth of shares. FPIs are likely to have taken fresh short positions in derivatives to account for the decline, but data supporting this was only released by NSE at the time of going to press.

The drop in local markets followed an overnight slump of 2.58% and 3.6% in the Dow Jones and Nasdaq indexes respectively after the Fed’s announcement. In Asia, South Korea’s Kospi and Jakarta Composite lost almost 2% each, with China’s CSI 300 the only exception, closing 0.9% higher. The French CAC was almost 1.5% lower, while the German Dax fell one percent at the time of writing.

Tepid OI increase

The open interest (OI) positions in the Nifty monthly futures contract underline Jasani’s expectations of a near-term recovery. While the OI rose by only a fifth of a percent, the contract price fell by almost a percent to 24021.50 per share (25 shares make up a contract). The contract expires next Thursday. A price drop accompanied by relatively flat open interest indicates that the market may be approaching bottoming.

The rupee fell by 19 paise to close at a low of 85.13 due to likely FPI outflows as companies in which they had significant stakes saw heavy selling.

Investors will now look forward to US third-quarter GDP data later tonight, as well as the minutes of the Reserve Bank of India’s December 6 monetary policy committee meeting, due on Friday.

ICICI Bank, Reliance Industries, HDFC Bank, Infosys and Tata Consultancy Services together accounted for almost three-fifths of the Nifty’s decline of 247.15 points.

Broader markets perform better

The broader markets outperformed the benchmarks with the Nifty Midcap 150 and Nifty Smallcap 250 down 0.24% and 0.3% to 21571.3 and 18,057.20 respectively.

“Overall, we expect Indian markets to remain subdued and follow global cues in this volatile environment,” said Siddhartha Khemka, head of asset management research at Motilal Oswal Financial Services.

“For traders, the key support zones are at 23870/79,000 and the 200-day SMA (simple moving average) or 23825/78800,” said Shrikant Chouhan, head of equity research at Kotak Securities. “If the index stays above these levels, we could see a quick pullback towards 24150-24200/79500-79800. Conversely, if the SMA falls below the 200 day SMA or 23825/78800, it could drop to 23750-23725/78500-78350.”