Here’s why the Nifty 50 and BSE Sensex indices pulled back

The BSE Sensex and Nifty 50 indices retreated on Wednesday as investors embraced a risk-off sentiment in the market. The Nifty 50 index retreated by more than 1% and reached a low of INR 21,750. Similarly, the Sensex pulled back to INR 72,000. Still, the two indices have done well this year and are sitting near their all-time highs.

The main reason why the Nifty 50 and Sensex indices crashed is that global risks are rising, putting the world on edge. The biggest risk is that there are signs that the Middle East crisis will escalate in the coming weeks. 

On Monday, Houthi rebels attacked an American merchant vessel at the Red Sea and vowed to continue with these attacks. On Tuesday, the same happened as they attacked a Greek ship, leading to retaliatory attacks by the US.

Elsewhere, Iran took responsibility for an attack that happened near a US base in Iraq. Taken together, there is a likelihood that this crisis will escalate and lead to higher inflation globally. Shipping costs have already surged while the price of crude oil has remained at an elevated level.

The implication of all this is that central banks will likely maintain their hawkish stance for a while since inflation is remaining sticky. In India, the RBI will likely maintain rates at an elevated level for a few more months.

This reason explains why American and European indices have also plunged. The Dow Jones Industrial Average (DJIA) dropped by 230 points on Tuesday while the Nasdaq 100 and S&P 500 fell by 30 and 18 points, respectively.

The Nifty 50 and Sensex indices also plunged after the latest Chinese economic numbers. According to the National Bureau of Statistics (NBS), the economy expanded by 5.2% in 2023, better than the Beijing target of 5%. 

The economy grew by 5.2% in Q4, missing the estimated 5.3%. Retail sales rose by 7..4%, also lower than the median estimate of 8.0%. Further data showed that the unemployment rate rose to 5.1% while fixed asset investments rose by 3%.

These numbers show that the Chinese economy was in a transition in 2023 as it emerged from the Covid-19 lockdowns. Recently, however, there are signs that the economy is slowing as evidenced by the recent drop in iron ore, copper, and lithium prices.

This explains why Chinese indices like the Hang Seng, China A50, and Shanghai Composite collapsed. Hong Kong’s Hang Seng crashed by more than 3% while the others retreated by over 2%.

Therefore, the Nifty 50 and Sensex indices dropped because of the importance of China’s economy to India. However, recently, Chinese and India’s stocks have diverged, with the Nifty 50 beating the Hang Seng in terms of market cap.

Most Nifty 50 and Sensex components were in the red on Wedneday. Some of the most notable laggards were companies like HDFC Bank, Bajaj Auto, Hindalco Industries, and Tata Steel. Other notable laggards were Axis Bank, Kotak Mahindra, and Maruti Suzuki.

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