Market retreats 1.5% after record gains amid profit booking

Mumbai: India's broadest equity gauges retreated about 1.5% on Tuesday, as traders booked profits a day after stocks had climbed the most in four years.

The truce along the western front and prospects of a Sino-American trade deal had undergirded Monday's stellar performance, with both indices soaring nearly 4% each.

"On Monday, the announcement of a ceasefire in the India-Pakistan conflict triggered significant short covering, resulting in an overreaction in the markets," said Sham Chandak, head of institutional equities, at Elios Financial Services. "Today, the markets saw some corrections from these elevated levels, and the weekly Sensex expiry contributed to a pullback in the headline indices."

The Nifty fell 346.3 points, or 1.4%, to 24,578.3. The Sensex declined 1,282 points, or 1.5%, to 81,148.2. By contrast, the Nifty Midcap 150 gained 0.2% and Nifty Smallcap 250 rose 0.8%.

Agencies

Mid- and Smallcap Space

Easing consumer inflation prompted analysts to believe a further reduction in policy rates in the June review could aid risk assets.

"A rate cut is anticipated in the first week of June, given the limited upside risks to inflation," said Chandak. "Corporate earnings are expected to improve in the coming quarters, supported by a lower base, and the overall macroeconomic indicators remain favourable." He expected the Nifty to trade within the 24,000-25,000 range over the next two to three months.

Dharmesh Shah, head of technical research at ICICI Direct, said the market decline was driven by profit booking. "The market breadth is currently positive, and we may see the Nifty heading toward 25,200 levels in the coming month," he said.

Stock-Specific Action
Shah said the mid- and smallcap space is seeing stock-specific action, and earnings are deciding the direction of stock movements.

On Tuesday, foreign portfolio investors net sold shares worth Rs 477 crore. Domestic institutions were buyers to the tune of Rs 4,274 crore.

Elsewhere in Asia, gauges in Japan advanced 1.4%, China 0.2% and Taiwan 1%. The index in Hong Kong fell 1.9%, while the Kospi in South Korea remained flat.

The pan-Europe index Stoxx 600 was 0.12% higher at the time of going to press.

At the end of the trading session, the Nifty's Volatility Index (VIX), the fear gauge, fell 1.04% to 18.2. The index has risen almost 13% in the past month.

Chandak of Elios said the US-India trade agreement would be the next trigger, still a couple of months away. "At present, we are constructive on banks, textiles, CDMOs (contract development and manufacturing organisations), microfinance institutions and defence manufacturing companies," he said.