The BSE Sensex crashed 1,100 points on Friday as NBFCs suffered sudden selling pressure, raising the spectre of another Black Friday before quickly recouping a major part of the intra-day losses.
The sentiment swing on the market was so wild that the benchmark index lost 800 points within minutes. The 50-share index Nifty also tracked losses, slipping below 11,000-mark.
Heavy and swift selling was witnessed on most of the non-banking financial stocks. While Dewan Housing Finance Corporation (DHFL) lost 57 percent, Indiabulls Housing Finance was down nearly 30 percent. IL&FS Investment Managers and Religare Enterprises lost nearly 20 percent each.
The rout was triggered by further bad news stemming from under-pressure Infrastructure Leasing & Financial Services Limited (IL&FS). The infrastructure company said on Friday it was selling majority stake in its financial services unit and offloading assets worth Rs 4,500 crore. The company has been struggling to pay off debt and avoid bankruptcy. The company, which undertakes premier infrastructure projects in the country, also sent an SOS to the central government to urgently clear dues worth as much as Rs 16,000 crore.
The finance conglomerate also hired SBI Capital to help in its hunt for an investor for the majority stake in IL&FS Financial Services, Mint reported.
The news worsened sentiments for the NBFCs, sending shares in them crashing. "The cost of borrowing for NBFCs is going to shoot up and they may face challenge in raising money in light of recent news on IL&FS. However, this knee-jerk reaction is baffling," Hitesh Agrawal, head of retail research at Religare Securities, told the Economic Times.
The latest bout of extreme volatility will further worsen investor sentiment. The Sensex has lost more than 1,700 points in the last 20 sessions. India's benchmark stock index had breached the 38,402 levels on August 20 in intra-day trade, taking a mere 16 months to rise 8,000 points.
Though the markets had opened on a positive note on Friday, the crash in YES Bank stock sent forebodings. The lender's shares fell as much as 20 per cent, weighed in by the RBI move to limit the term of CEO Rana Kapoor to only up to January 31.
Apart from NBFCs and YES Bank, shares of Maruti Suzuki, HDFC, Infosys and Sun Pharma also came under selling pressure.
Sensex can trim further 2,000 points and the Nifty can lose 1,000 points, as Indian stock markets are "extremely overvalued", said Rajat Sharma of Sana Securities. "Nothing has changed fundamentally, I mean we have the same macro-economic situation, etc, but when a sell-off happens, nobody can predict," Sharma told told FE Online.
Earlier this week, Goldman Sachs had warned that India's booming stock market may enter a period of caution amid elevated valuations, a likely slowdown in the economy and the upcoming elections. Goldman Sachs also downgraded Indian stock markets the equivalent of a hold rating from buy.
"The risk-reward for Indian equities is less favourable ... The key reasons for our less optimistic view include, among others, stretched valuations, multiple macro headwinds in the near term and election event risk," Goldman Sachs analysts said.