Indian markets stumble on external triggers

The main benchmark SENSEX is down 3%.

Unfavourable externals were yet again the key trigger as weak global demand, rather than purely supply issues, is being held responsible for low commodity prices, oil in particular, a report by DBS says.

Upcoming Greek elections also soured the mood. Tuesday’s negative finish in the US and European markets will keep the Indian counterparts under pressure today.

Here’s more from DBS:

Given last year’s strong foreign inflows into India’s equity and debt space, and the ensuing over 30% rally in the equity indices (/drop in bond yields), bouts of correction are inevitable. Notably, during a similar bout of markets’ nervousness in late-Dec14, foreign outflows were concentrated in equities, while debt flows were largely unchanged.

One needs to watch if this differentiated response repeats. If it does, it might imply: a) apart from profit-taking, equity investors are adjusting down with the slower (than priced in) improvement in corporate profitability and growth; b) but this is of concern as cumulative equity inflows are more sizeable than debt; c) the relatively positive view on Indian debt markets reflect rate cut expectations; and d) Indian yields are more attractive than regional peers, backed by the economy’s improving fundamentals.