Sensex falls 700 points. Mauritius link and 5 other factors behind the selloff

Nifty Bank, which had scaled 49,000-mark for the first time, was also trading weaker by about 0.8%.

Today's selling pressure comes after Sensex zoomed past the 75,000 mark on Tuesday and the market capitalisation of all listed stocks on BSE achieved the new milestone of Rs 400 lakh crore on Monday.

Here are 6 key factors behind the fall in Sensex, Nifty today:

1) Pressure from FPIs
The single biggest worry for foreign investors at the moment could be the inking of a protocol to amend the India-Mauritius tax treaty after which FPIs could face greater scrutiny.

The amendment specifically states that relief under the treaty cannot be for the indirect benefit of residents of another country. In almost all cases, the shareholders or investors in Mauritius entities making investments in India are from other countries.

Mauritius is the fourth-largest source of FDI in India and owns about 6% of total FPI assets in the country.

Also read |

2) US inflation
A hotter-than-expected inflation data in the US has dampened hopes that the Federal Reserve would begin cutting interest rates as early as June. Wall Street traders now expect that there are 23% chance of Fed cutting rates in June, down from roughly 62% chance a week ago.

Fed minutes out on Wednesday also showed that officials had begun worrying that inflation progress might have stalled before the March inflation data, with some raising the possibility that the current policy rate was not restrictive enough.

3) Bond yields
The hotter-than-expected US inflation has spiked the US bond yields. In the last one week, the US 2-year yield is up around 400 bps while the 10-year yield is higher by about 340 points. Higher yields are negative for FPI inflows.

But analysts suggest that dips may get bought as domestic liquidity remains high.

4) Valuation stress
Undoubtedly, the long-term view on India remains bullish but given the fact that the market is at an all-time high investors have turned cautious on valuations. "With valuations being overstretched, we advise investors to hold off on making investments until there has been a sizable correction in the markets," said Amit Goel of Pace 360.

5) Profit booking
Investors have also been booking profits and tweaking portfolios in this leg of the bull run. The market's attention will turn to March quarter earnings which begins today with TCS. "Earnings growth in India is showing signs of contraction, with EPS growth expected to moderate to 5-10% in Q4 compared to the robust 25% experienced between April and December 2023," said Vinod Nair of Geojit Financial Services.

6) Rising commodity prices
Prices of various commodities like gold, silver, zinc, copper, cocoa and coffee are on an uptrend.

"Rising commodities means rising inflation. If inflation rises then central banks have no other choice but to hike interest rates. This means higher borrowing costs for corporates and consumers. High costs means low profits. Markets don't like falling profits. What follows is a vicious cycle of falling stock prices," Apurva Sheth of Samco Securities said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)