Benchmark indices declined for the third consecutive session after the US Federal Reserve (Fed) signalled that interest rates could stay higher for longer. Other headwinds such as a spike in crude oil prices and rising tension between India and Canada -- a key source of foreign capital -- also weighed on investor sentiment. Furthermore, foreign portfolio investors (FPI) intensified their selling, pulling out over Rs 3,000 crore ($360 million) for a second day.
The Sensex closed at 66,230, with a decline of 571 points or 0.9 per cent, while the Nifty50 fell 159 points, or 0.8 per cent, to close at 19,742.
As expected, the Fed kept its benchmark rates unchanged on Wednesday, but its quarterly projections showed borrowing costs will remain higher for longer.
The quarterly economic projections revealed that 12 out of 19 Fed officials expected to raise the rates again this year. Analysts noted that policymakers see fewer rate cuts than anticipated due to a stronger labour market. The Fed’s projections were more hawkish than the markets had priced in.
Over the last 18 months, the Fed has raised interest rates from nearly zero to a 22-year high of 5.25 to 5.5 per cent. However, the US economy has remained resilient amid strong consumer spending and a robust labour market.
"The new dot plot projections were clearly more hawkish than expected. While the Fed continues to see one more rate hike for the rest of 2023, it raised its end-2024 and 2025 dot plot projections by 50 basis points, each, essentially signalling 'higher-for-longer' rates," said Chetan Seth, equity strategist at Nomura. "We think Asian stocks will likely face some pressure in the very near term given the hawkish outcome. Rising US bond yields, a stronger US dollar and elevated energy prices -- all these are ingredients for a bad recipe for Asian stocks," he added.
Actions by other central banks also did little to lift investor mood. Norway's Norges Bank raised borrowing costs on Thursday to the highest level in more than 14 years and indicated that it would likely raise rates again. Sweden's Riksbank increased its key rate as expected and said more hikes were possible. The Bank of England, however, has left interest rates unchanged for nearly two years.
From their record high last Friday, the Sensex and the Nifty50 have now declined by 2.4 per cent and 2.3 per cent, respectively.
"The market has fallen in the last three days amid profit-booking at higher levels. Uncertain global cues and persistent selling by FPIs will likely keep markets under pressure. It would be better to prefer defensive sectors for some time until the market stabilises," said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services.
Brent crude prices moderated in the last two sessions but are still trading at $92.5, 9 per cent above their close three weeks ago. Rising crude prices are also complicating central banks' efforts to rein in inflation.
On Thursday. market breadth was weak, with 2,436 stocks declining and 1,230 advancing. Four-fifths of the Sensex stocks declined.
Barring one, all sectoral indices of the 30-share index finished lower. The gauge for the performance of banking stocks fell the most, at 1.75 per cent, followed by the auto index, which declined by 1.6 per cent.
Shares of ICICI Bank fell nearly 3 per cent, contributing a negative 170 points to the Sensex. Peer HDFC Bank declined by 0.7 per cent, extending its two-day fall to 5 per cent. Market observers noted that these two stocks have large FPI holdings.
Shares of Kotak Mahindra Bank fell nearly 2 per cent. The Canada Pension Plan Investment Board) has the highest exposure to this stock in absolute terms. Deteriorating ties between India and Canada have raised concerns over investments by large Canadian funds in domestic markets. At the end of August, assets of FPIs domiciled in Canada stood at nearly Rs 1.8 trillion ($21 billion).