Cogencis, Monday, Aug 31, 2020

By Chiranjivi Chakraborty

MUMBAI – The staggering rally in domestic equities in the past few months suffered its biggest setback today as anticipation of implementation of a much-debated margin requirement regulation by the capital market regulator from Tuesday forced investors to take profits.

Market participants blamed much of the selling in today's session on investors' panic over an odd clause in SEBI's new margin regulation that requires investors to pay upfront margins for even the shares being sold by them.

Investors were also concerned that liquidity in the market will fall dramatically from Tuesday as the new upfront margin requirement for cash market trades will deter speculators, making it hard to find the appropriate price for their stock holdings.

Another factor related to the new margin rules that market participants said led to the sell-off was that brokerages were not equipped for the new manner in which margins given as pledged securities was considered.

Many brokerages today forced clients to either pay cash for the additional leverage taken by them for trading by pledging their existing securities as margin or square off their positions before the end of trade. Given that leverage-based positions in the market were high prior to today, many clients opted to liquidate their positions, said dealers.

The selling pressure cut short the Nifty Midcap 100 index’s longest winning streak in two years to 10 sessions, as broader market faced the majority of the selling in the market.

The Nifty Midcap 100 index and Nifty Smallcap 100 index ended 4.0% and 4.8% lower, respectively. The Nifty Midcap 100 index registered its biggest one-day loss since May 18 and the Nifty Smallcap 100 since Mar 23.

Bluechip stocks weren’t spared either with the Nifty 50 and BSE-Sensex recording their biggest one-day losses since mid-May and snapped a six-day long stretch of gains.

The 50-stock Nifty 50 index closed 2.2% lower at 11387.50 points, while the BSE-Sensex ended at 38628.29 points, down 2.1%.

However, the implementation of the new SEBI regulation was not the only catalyst. Fresh skirmish between Indian and Chinese troops near the international border in Ladakh also made some investors nervous.

The repeat of the heightened uncertainty between two of the largest Asian economies of June will keep foreign investors on the edge, said dealers.

"I think it is more to do with cascading selling as one guy started selling and other followed in toe…at one point there were no bids," said an institutional dealer at a city-based brokerage firm.

Domestic equity markets have surged in the past three months aided by easy global liquidity, hope of a V-shaped recovery in the economy from the pandemic-induced recession and hope of a vaccine for COVID-19 by the end of the year.

Foreign institutional investors and domestic retail investors have been the biggest buyers of equities in the past three months as cautious domestic institutional investors remained on the sidelines.

Foreign portfolio investors net bought equities in the primary and secondary market worth $10 bln, reflecting the benefits that equities of emerging market have received from the US Federal Reserve’s near zero interest rates and infinite buying of government-backed bonds.

On other side, retail investors attracted by the relentless rise of the stock market continued to pour money directly into small-cap and mid-cap stocks to make quick bucks. More than 4 mln new de-materialised accounts were opened in Apr-Jul, reflecting the euphoria among investors.

In that backdrop, institutional dealers said that it was foreign and retail investors who drove the selling in the market. But dealers expect some retail and domestic institutional investors, who had been waiting on sidelines for a correction, to buy the dip and help the market rebound in the coming sessions.  End

US$1 = 73.61 rupees

Edited by Akul Nishant Akhoury