Nifty declines over 1% from all-time high scaled today; what is keeping investors worried?

Amid positive global market mood, Indian equities in the early trade notched higher, taking Nifty to record all-time high of 22,794.7. Meanwhile, Sensex at day’s high logged levels of 75,095.18. Nevertheless, in afternoon trade, both the indices witnessed sharp sell-off and the headline index slumped over 1 per cent from record high.  Atul Parakh, CEO of Bigul said that as per market reports, the initial optimism surrounding the latest economic data was overshadowed by concerns over high inflation and the potential for further interest rate hikes. Investors grew cautious as hawkish comments from central bank officials suggested a more aggressive monetary policy stance to tame rising prices. Additionally, geopolitical tensions and lingering supply chain disruptions contributed to the risk-off sentiment, prompting investors to book profits after the market's early gains, he added.

Here are some of the key factors that caused a broad-based sell-off on Dalal Street, dragging the Nifty away from an all-time high registered earlier in the session:

FII selling:

Foreign institutional investors (FIIs) on the previous day based on the provisional data on the NSE net sold Indian equities worth Rs 964.47 crores. Chokkalingam G - Founder - Equinomics Research held that FIIs are selling continuously and it is likely that they may continue their selling till a new government is formed. Generally when any big event like this happens FIIs do not make significant buying. Their selling is giving some pressures in the market and after seeing such continued selling retail investors also toned down their buying, added the expert.

Global markets:

Indian markets which in early trade mirrored a positive sentiment witnessed in Asian trade saw profit booking as the fears of high-for-longer interest rates in the US offset any optimism. Hong Kong’s Hang Seng was up 1.34 per cent, while Taiwan markets also traded higher by 0.4 per cent. The investors now await the US nonfarm payrolls data due later today, for cues on interest rate trajectory.

Broader market losses:

Nearly all the sectoral indices succumbed to selling pressure, with IT, PSU Bank, Private Bank and Realty indices leading the losses of up to 1 per cent. 

Volatility Index:

India VIX, a  measure of market’s expectation of volatility over the near term, has risen sharply by 10.71 per cent to 14.89 levels, leading to heightened volatility in the markets today. Prashanth Tapse, Senior VP (Research), Mehta Equities, held that India VIX is trading high near the 15 level, indicating risk returning back to market after continuous rally of 1000 points in benchmark Nifty. "I feel geopolitical tension would make headlines again giving traders an option to go short on markets. Overall, Q4 earnings are neutral to positive and not so impressive. There are few reports which suggest that FIIs have reduced holding in large caps stocks like HDFC Bank and ITC. For the short term the trend remains cautious and focus would be on fresh geopolitical headlines. Hence, we advise traders to remain light on positions," he added.

US 10-year treasury yield climbs after dropping to 4.5%

The US 10-year yield fell to 4.5 per cent as the markets largely determined that the US Federal Reserve might resort to rate cuts only once or twice this year, based on the data. Nevertheless, it recouped some of the losses and traded higher by 0.44 per cent at 4.588 per cent, triggering losses in Indian market to some extent. 

However, the US dollar index continued its losing streak and hit levels of 105.28. Any losses in the dollar index result in risk-on sentiment in the market.

“The U.S. central bank put a red flag on recent disappointing inflation readings and suggested a possible stall in the movement toward more balance in the economy,” Reuters report said.