Nifty likely to remain below 10,000 as stocks enter long-term correction

The key Nifty 50 stock index in India is likely to breach the 10,000 support mark this week as the Indian stock market enters what many have called its deepest correction since the 2008 financial crisis.

The Nifty, which reflects the stock prices of 50 bluechip stocks traded on the National Stock Exchange, had gone from around 2,600 in early 2009 to around 11,600 last month, averaging a return of around 40% every year for the last nine years.

The rise was largely the result of a flood of money from the US Federal Reserve to India, among other markets, due to the ‘Quantitative Easing’ policy of the US Central Bank that started in November 2008.

The US Central Bank went on to pump trillions of dollars (hundreds of lakhs of crores of rupees) into the global financial market in an effort to spur economic activity. While the stimulatory impact of the cash infusion is still the subject of debate, the massive influx of liquidity did raise the prices of assets across the globe by several times.

With debt levels reaching unsustainable levels, the US Fed started sucking some of the money out last year, and also started raising interest rates — leading to the present correction in asset prices, including those of bonds, stocks and real estate.

“Of all the bear markets (seen in India), I thought this was the easiest to call,” said Shankar Sharma, Vice Chairman at First Global in an interview to CNBC TV18 over the weekend. “This is not a garden-variety bull-market correction.”

The Indian markets started correcting almost a month ago, as Foreign Institutional Investors — who served as the channel for bringing in US money to India — started unwinding their position in the Indian stock and bond markets.

Nifty has already given up about 13% of its value from the peak seen last month. While domestic investors, especially mutual funds, initially saw this as a ‘buying opportunity’, they have been unable to match the selling by the foreign players.

The correction gathered pace last week after the US stock market too started going down.

The Nifty declined by about 6% last week, falling about 2.7% just on Friday. It is expected to continue to fall this week, and end well below the 10,000 mark.

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