Markets may continue to remain highly volatile

Indian equity markets posted a second consecutive weekly drop in eight months, with both Nifty/Sensex plunging -5.1%/-5.3% to close at 13,635/46,286. Nifty fell for the first time in all five sessions of the week since February last year and has now declined over 1,000 points from its all-time high. The broader market, however, fell less with both Nifty Midcap100 / Smallcap100 down -3.5%/-2.3%.

All the sectoral indices ended in red with IT, Auto, and Energy being the biggest losers, down 6-7%. Rest all the sectors ended 2-5% down. FIIs who have been continuous buyers since October 2020 onwards, turned net sellers for the first time this week, having sold equities to the tune of Rs 12,100 crore, while DIIs turned net buyers to the tune of Rs 3,800 crore.

Global cues were weak as US markets battle between hedge funds and retail investors and a row in Europe over Covid-19 vaccine supply cooled risk appetite. There were also deepening concerns about stretched valuations and about possible roadblocks to the US stimulus plan. In addition, while the US Fed kept rates unchanged as expected, policymakers flagged a concerning slowdown in the pace of the economic recovery which further dented sentiments.

On the domestic side, Nifty witnessed a volatile week with stock-specific moves as the overall mood of the market remained subdued given the monthly F&O expiry. It continued to witness profit-booking ahead of the Union Budget which is going to be presented on February 1. Even FIIs have been sellers for five consecutive sessions which added to the nervousness as this sharp market rally was largely liquidity-driven. For FY21, Economy Survey estimated the economy to contract by 7.7% and sees FY22 real GDP growth at 11%, which failed to cheer the market. After the Economic Survey 2021 advocated adequate capitalisation of PSBs, the sector witnessed remarkable gains.

Technically, Nifty continues its formation of lower top - lower bottom from the last five sessions and formed a Bearish candle on daily scale. Now, till it remains below 13800, bounce could be sold and weakness may be seen towards 13500-13300 levels while on the upside key hurdle exists at 13800-14000 levels. India VIX moved up to 25.34 levels at the end of the week. Surge in volatility due to selling pressure and ahead of the Budget 2021, could keep volatile swing with limited upside in the market.

Going ahead, markets may continue to remain highly volatile amidst ongoing earning season and Union Budget 2021 on February 1. Expectations from the budget are running high. However, the government’s fiscal response in 2020 indicates certain inflexibility and the lack of resources to stimulate the economy. We would suggest investors to take opportunity of this fall and accumulate quality stocks on dips while traders should be cautious with stock-specific action. Market would also track RBI’s monetary policy next week along with BoE’s monetary policy for further cues.

(The writer is Siddhartha Khemka, Head – Retail Research, Motilal Oswal Financial Services Ltd.)