Indian stock markets bounced back in October, with the Nifty rising 1.5 per cent despite five days of consecutive selling seen towards the end of the month. Though it is trading off September lows of 7,539, but the current set-up does not inspire confidence and a huge selloff may be around the corner. The Bank Nifty, which had led the October rally, has fallen almost 3.75 per cent in the last week. The Nifty is likely to follow and a test of 7,500 is likely in November.
Here are the reasons why Nifty is set to slide this month:
1. Bihar assembly election results, due on November 8, can lead to a major selloff in Nifty. Most market participants are assuming that an NDA defeat would not impact the market too much, but a loss would delay the GST indefinitely and impact many other key reforms.
2. Technically, the Nifty is undergoing a third wave of Elliott wave correction. The first fall was from 9,119 to 7,940 (1,179 points), the second was from 8,654 to 7,539 (1,115 points), while the third (which is in the process) fall could see the Nifty losing 1,800 points as per Elliott wave theory. This means the Nifty could hit a low of 6,700.
3. Quarterly results of most heavy-weight Nifty companies have been disappointing, which means there's no scope of re-rating in most Nifty stocks. The Nifty at 8,200 is priced around 18-19 times FY17 estimated price earnings and needs to correct to factor lower earnings of individual components.
4. The weakness in oil prices seems to have led to complacency on the fiscal front. The government's disinvestment target is looking aggressive and may be curtailed, which may impact the 3.8 per cent deficit target.
5. Foreign institutional investors, who turned net buyers of domestic equities in October after selling aggressively in August-September, are expected to be on the sidelines in November, which will weigh on sentiments.
6. The rupee, which has consistently outperformed most emerging market currencies, may succumb to pressure and test levels of 68. A 25 basis point rate hike in the US in December will act as a dampener on global emerging market currencies. Among other global factors, China's slowdown will continue to weigh on emerging market equities.
(Sanjiv Bhasin is executive vice president-markets and corporate affairs at India Infoline Ltd)
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