Why did a sudden bear attack bring Sensex down by over 900 points?

After a remarkable performance throughout December, the Indian stock market witnessed a sudden downturn on Wednesday, with the benchmark Sensex falling below the 71,000 threshold.

This decline comes after the index had earlier this month soared past this historic mark, buoyed by the positive sentiment following the results of the 2023 state assembly elections.

After a strong bull run

Since the declaration of the election results on December 3 and 4, the BSE Sensex has been on a consistent upward trajectory, maintaining its position well over 71,000 points.

However, the markets experienced a jolt on December 20, as Sensex plummeted by 931 points at market close, dipping below the 70,500 mark. Major stocks like TCS and Hindustan Unilever were among those that registered significant losses.

The NSE Nifty, mirroring the trend of the Sensex, also experienced a drop, falling below the 21,200 mark after what had been a record-breaking run in the Indian stock market.

Covid menace hurts

Analysts point to a resurgence of COVID-19 cases across India, driven by the new sub-variant JN.1 first detected in Kerala, as a key factor contributing to the market's volatility.

This development revives concerns similar to those during the initial lockdown in March 2020, raising apprehensions about the potential impact on the economy.

FIIs cut holdings

Another critical factor influencing this sudden market shift is the behaviour of Foreign Institutional Investors (FIIs). The latest data shows that FIIs have significantly reduced their holdings in Indian shares, offloading around Rs 601.52 crore (£50.7 million) in the last market session.

In contrast, Domestic Institutional Investors (DII) only made purchases totalling Rs 294 crore (£20.7 million), highlighting a clear disparity in investment patterns.

Likely resurgence in early 2024?

Despite the current downturn, brokerage firm HDFC Securities remains optimistic about the market's prospects. They predict that the early months of 2024 will witness a resurgence in the Nifty and Sensex, with an expected spike of eight to ten per cent, potentially leading to new market highs.

Investors and market watchers will be keenly observing the developments in the coming months, especially with the backdrop of the ongoing pandemic and its economic implications.