Sensex tanks 4,389 pts, its worst fall in 4 years

The BSE slumped 4,389 points, or 5.74%, to close at 72,079. The declined 1,379 points, or 5.93%, to end at 21,884. Both indices had fallen as much as 8.5% earlier in the session but recouped some of the losses as foreign investors cut a portion of their bearish bets. Still, this is the biggest in a day since March 2020. Just the day before, both indices witnessed the sharpest single-day surge since February 2021 to all-time highs following exit polls that predicted a thumping victory for the BJP. Analysts said the slide will accentuate if the Nifty falls below a key support of 21,000.

The sell-off on Tuesday led to India's total market capitalisation dropping by ₹31 lakh crore.

As the market awaits the formation of the new government, investors are assessing the red-hot Indian stock market in the face of new political realities and equations.

"The results have come at a time when the market has been trading at above-average valuation and retail investors' appetite for direct equity is at an all-time high," said S Naren, CIO, . "We will wait for a few more days for the government to form to take a firm view on the market."

Brokerage , which retained its underweight rating on India, said one of the impulses behind India's rich valuations was the perception of political stability and policy certainty.

"This was not an election outcome the market valuations were set up for," said UBS analysts, including Sunil Tirumalai, in a client note. "India valuations have been expensive for ordinary corporate earnings growth/outlook."

Traders' perception of heightened risk in the market reflected in the 23.7% spike in the Volatility Index or VIX (a fear measure) on Tuesday to 25.89 - the highest level since March 9, 2022. Since April 23 this year, the VIX has soared 162%.

Fund managers and analysts said the market levels before the seven-phase election that ran from April 19 to June 1 showed stocks had factored in a scenario of the BJP-led NDA winning at least 350 seats in the elections.

"Markets like certainty and so any change in expectations that market participants were otherwise anticipating thus causes some reset," said , co-CIO, Aditya Birla Sunlife Mutual Fund.

Brokerage Emkay Global said it expects a "market derating" in the short term as risks in India have gone up. It recommends buying stocks if the Nifty falls below 20,000.

Foreign portfolio investors dumped shares worth ₹12,436 crore, while their domestic counterparts were buyers to the tune of ₹3,319 crore on Tuesday.

Adani Group shares, which have been top performers in the past decade, tumbled 10-22%. Shares of public sector companies - Dalal Street darlings in recent years - took the biggest pounding with the BSE PSU index diving 15.7%, the biggest ever fall in a day.

"Factor market reforms like those related to land, agriculture, and labour are now off the table, in our view," said Emkay's analysts led by Seshadri Sen in a client note. "Privatisation and asset monetisation are also at risk, which could drag government capex in the short term."

Shares of consumer-related companies such as Hindustan Unilever, D-Mart (Avenue Supermarts) and Dabur jumped 4-6%, on expectations the government will spur rural consumption.

The broader market also tumbled on Tuesday with the Mid-cap 150 index dropping 7.1% and the Small-Cap index declining 7.5%. Of the 3,934 stocks traded on the BSE, 3,427 declined and 418 advanced.