Sensex plunges over 1,500 points, worst day in 2 months; here's what's spooking investors

Indian equity benchmarks continued to fall for the fifth session in a row on Monday, with the Sensex nosediving more than 2,050 points in its worst intraday drop in 11 months. The broader Nifty50 benchmark briefly slipped below the 17,000 mark in a market crash fuelled by a sell-off across sectors. Both headline indices turned negative for 2022.

All eyes were on the outcome of a scheduled policy review due this week, at a time when investors fear an earlier-than-expected normalisation of monetary policy.

Both headline indices fell as much as 3.5 percent during the session. The 30-scrip index plunged 2,053.2 points to 56,984 and the Nifty50 slid to as low as 16,997.9, losing 619.3 points from its previous close - their worst intraday fall in percentage terms since April 12, 2021.

The Sensex finished the day at 57,491.5, down 1,545.7 points or 2.6 percent from its previous close, and the Nifty shed 468.1 points or 2.7 percent to settle at 17,149.1 - their biggest drop since November 26.

All sectoral indices were deep in the red, with the Nifty Bank dropping 1.7 percent at the close, and the metal index slumping 5.2 percent. Volatility gauge VIX surged 20.8 percent to 22.8 - its highest close since May 4, 2021.

Barring two stocks, Cipla and ONGC, all stocks in the 50-scrip basket were in the red. JSW Steel, Bajaj Finance, Tata Steel, Grasim, Hindalco, Tech Mahindra and Wipro, closing around 5-7 percent lower each, were the worst hit among the top blue-chip laggards.

Broader markets also bled, with the Nifty Midcap 100 and Smallcap indices plunging 3.9 percent and 4.8 percent respectively.

A combination of factors, including concerns about expensive valuations, earlier-than-expected tapering of the pandemic-era stimulus, sustained selling by foreign investors - which could spell trouble for emerging markets such as India - the pandemic, and accelerating inflation amid high crude oil prices, rattled the markets.

Here are some of the key factors behind the market crash:

Higher interest rates: Investors globally have been staring at long impending hikes in key interest rates and withdrawal of COVID-era stimuli. Hawkish comments by Federal Reserve officials and data pointing to worsening inflation have forced investors to assess how soon it would be before central banks act on ultra-loose monetary policy.

The Federal Reserve is due to reveal its policy decision on Wednesday.

The US central bank has already announced an end to its massive bond-buying programme and paved the way for three 25-bps rate hikes by the end of 2022, citing uncomfortably high inflation. The Bank of England has already become the first major central bank to hike key rates.

Foreign fund outflows: Foreign institutional investors have net sold Indian equities worth Rs 8,791 crore ($1.2 billion) so far in 2022. In the October-December period, they withdrew a net Rs 38,521 crore ($5.1 billion) from Indian shares, provisional exchange data shows.

Less liquidity in global markets could reduce allocations by foreign investors to markets, including India.

Overheated valuations: Many experts have been warning of Indian equities' valuations soaring to uncomfortable levels.

Last year, several foreign brokerages and even the RBI flagged expensive valuations in India. Until late October 2021, the Indian market had seen a near one-sided rally driven by liquidity. Although this month, the headline indices did come within one percent of their all-time highs, the latest sell-off has sent them about 9.5 percent lower.

COVID-19: The new variants of COVID-19 including the Omicron continue to worry investors globally. Though there is a fall in new infections in many parts of the country, it is still not clear whether the recently imposed restrictions will continue going forward. In late 2021, authorities in several parts of India brought back restrictions in a bid to curb the spread of the Omicron variant.

Crude: Though crude oil has receded from its recent peaks, it is still up more than 10 percent for the year. Brent crude futures - a global benchmark -- are currently hovering near the  $87-88 per barrel mark.

Morgan Stanley has raised its forecast for Brent to $100 a barrel for the second half of 2022.

India meets the lion's share of its oil requirement through imports.

Inflation: Higher price increases across the globe have continued to fuel concerns about faster-than-expected interest rate hikes. Businesses across sectors have been struggling against a sustained spike in raw material prices despite taking a series of price hikes.