A sharp correction in the share price of HDFC Bank, India’s largest private sector lender, dragged the markets lower on Wednesday, with both the benchmark indices dropping nearly 1.2 per cent, marking their biggest single-day fall since July 21. Concerns about rising crude oil prices and valuations also weighed on sentiment as investors awaited the US Federal Reserve’s monetary policy decision later in the day.
The Sensex slumped 796 points to close at 66,801, while the Nifty50 index declined 232 points to settle below the 20,000 mark at 19,901. Wednesday’s fall was the sixth biggest in terms of percentage for the benchmark indices in 2023.
HDFC Bank’s shares slid 4 per cent on the BSE after the bank indicated a potential negative impact of the merger of HDFC Ltd on its key financial ratios. This was the worst fall for HDFC Bank since the merger became effective. The HDFC Bank stock closed at Rs 1,564 on Wednesday, much lower than Rs 1,679 — the price at which it had settled on the first day of trade after the merger on July 17.
The bank, which has the highest weighting in both the Sensex and the Nifty, accounted for more than half the losses in the indices. Shares of Reliance Industries (RIL), which has the second-highest weighting, dropped 2.2 per cent, contributing a 163-point decline to the Sensex.
Nomura’s latest note flagged concerns about reductions in net interest margins and a surge in bad loans in HDFC Bank’s corporate loan book. Nomura lowered its target price for HDFC Bank from Rs 1,970 to Rs 1,800.
Foreign portfolio investors (FPIs) sold shares worth Rs 3,111 crore, while domestic institutional investors were net sellers of Rs 573 crore worth of shares on Wednesday. HDFC Bank remains a top holding for both investor categories.
“The crucial question now is whether the margin pressures are unique to HDFC Bank or a broader industry issue. Analysts are currently uncertain,” Andrew Holland, chief executive officer of Avendus Capital Alternate Strategies, said.
Globally, surging crude oil prices have stoked inflation concerns, complicating central banks' efforts to achieve their inflation targets. Brent crude has risen 13 per cent over the past three weeks and is currently trading close to $95 a barrel.
“High oil prices have left investors uneasy, as this could force central banks to maintain higher rates for an extended period,” noted Deepak Jasani, head of retail research at HDFC Securities.
Market breadth was weak, with 2,207 stocks declining and 1,476 advancing. More than two-thirds of the Sensex stocks fell. The Nifty Midcap100 and the Nifty Smallcap100 indices dropped 0.3 per cent and 0.9 per cent, respectively. Analysts warned of a potential steeper correction in the mid and smallcap segments, urging investors to remain cautious.
“The exuberance in mid and smallcaps has pushed valuations to high levels. It remains to be seen whether the sharp rise in many of these stocks will translate into real gains. Investors may do well to focus on high-quality largecaps,” V K Vijayakumar, chief investment strategist at Geojit Financial Services, said.