Bulls on the edge, Sensex slips 736 points as Fed decision looms

All sectoral indices ended lower with IT, media, FMCG, and pharma indices falling the most.

While the Fed's two-day meeting ending Wednesday is expected to keep monetary policy unchanged, investors are looking forward to the central bank's comments on when it will start cutting interest rates.

On Tuesday, the Bank of Japan increased interest rates for the first time in 17 years, ending its long-standing negative interest rate policy. "The expectations from the US Fed to cut rates three times this year have diminished to two and they are expected to remain hawkish given the latest data, which has also driven up the bond yields," said Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies. "The rate increase from the Bank of Japan was also expected, however, the currency didn't appreciate as per market expectations, which would have helped emerging economies."

Holland sees the likelihood of 'downside momentum' in the market in the short-term.

The Nifty Midcap 150 dropped 1.12% and Nifty Small-cap 250 fell 1.18%. Out of the 3,928 stocks traded on the BSE, 1,188 advanced, while 2,633 declined.

Analysts expect the market to continue witnessing sharp swings.

"March has also historically remained volatile due to the end-of-year settlements, which can be seen carried forward to next financial year," said Sandeep Raina, executive vice president- research at Nuvama Professional Clients Group.

"The market has been seeing range bound volatility and it has not moved significantly in the last 20 days. We already had expectations of a correction since January, and with expensive valuations and elections around the corner, such movements can be expected to continue."

Analysts said technical indicators are pointing to further weakness.

"Since the year 2020, the Nifty has fallen eight times and in seven out of eight times, the index has fallen in the range of 7% to 10%," said Kapil Shah, technical analyst at Emkay Global. "The recent fall is 3%. So, the index can have further downside potential up to 21200 to 20800 level."

Shah expects midcaps and smallcaps to underperform in the near term, as they had good momentum in the last few months and now are seeing some cool off.