September Slump: SENSEX, NIFTY crash 5% as FII selling and crude oil spike rattle markets

The Indian equity benchmarks are on track to post their worst monthly performance in six months in September. The National Stock Exchange (NSE) benchmark NIFTY50 index has dropped as much as 5.3% in September, and the 30-share BSE benchmark SENSEX has dropped 5.36%.

FIIs turn net sellers

The sharp drop in September came after foreign institutional investors (FIIs) resumed their selling in Indian markets after a hiatus of two months in July and August, when they had turned net buyers.

FIIs have so far this month sold shares worth ₹17,131 crore in Indian markets after they net bought shares worth ₹49,831 crore in the previous two months, data from National Securities Depository Limited (NSDL) showed.

Selling by FIIs coincided with the United States 10-year bond yield surging to its highest level in nearly two decades. The yield on 10-year US bond surged to 5.2%, its highest level since 2007 triggering a flight of money from emerging market like India to the safety of US bonds, which offers a risk-free higher rate of return to global investors.

When US Treasury yields rise, investors can get a higher low-risk return in US government securities, which makes Indian assets relatively less attractive, analysts noted.

Rising crude

After softening earlier this month, surging crude prices has also added to the weak sentiment for investors amid tensions in West Asia. Brent crude futures for delivery in November rose over 1% to $106 per barrel after US President Donald Trump rejected a peace deal from Iran to resolve their conflict and reopen the Strait of Hormuz, keeping tensions in the Middle East elevated.

Iran announced a peace proposal last week at the UN General Assembly in New York, saying it had been transmitted to the Americans via Qatari mediators. Trump said on Saturday he rejected the plan, but told Axios in a phone interview on Sunday that he expected US negotiators to engage in more talks this week, according to a report by news agency Reuters.

Renewed tensions in West Asia and supply disruptions from the Strait of Hormuz has reignited fears of higher inflation for longer that can negatively impact earnings of Indian companies going ahead, analysts said.

Drought in Maharashtra

Worsening macroeconomic conditions also added to worries for market participants after the Maharashtra government declared drought in 265 of its 358 talukas, or 74% of the state, amid rainfall deficit and announced relief measures, including crop loan restructuring, land revenue concessions, and power bill subsidies.

The government will announce financial assistance for crop losses after the prescribed procedure.

RBI rate hike expectations

Expectations of an interest rate hike next month have also turned investors cautious.

The Reserve Bank of India (RBI) is likely to raise rates when the MPC meets for its bi-monthly policy review next month, following in the footsteps of the US Federal Reserve, which raised rates earlier this month.

Higher interest rates will lead to a higher cost of funds and a squeeze in the liquidity system, which does not augur well for markets, analysts added.