Nifty falls below 6000 mark first time in 2008 led by Mutual funds sell off

Indian stock market has seen heavy sell off in the past two days. The benchmark indices Nifty and Sensex have touched a low level of about 4-5% from the closing value two days back. We will try to analyse the reasons for this abrupt selling, but first we shall look into the trends of the Indian stock market for past one year. The following graphs are self-explanatory:

Variation of Nifty-50 over one year. Returns in excess of 50% in one year.

Past one month variation in Nifty index. Highly volatile. Nifty fell sharply in mid December 2007, and also rise sharply the next week. Touched new highs of 6300 in January 2008 before falling back sharply below the 6000 level in mid January. Will Nifty rise back sharply as seen in December last year, perhaps no one can say so for sure.

The last two days heavy sell off can be seen in this chart. On January 15, and 16 Nifty has fallen sharply and only in last hour of trading on January 16, bulls have tried to come back.

Reasons for sharp fall:

If we look at two big group of players in the Indian markets, the FIIs and the mutual funds, the perception of both are not same. While mutual funds have been one of major reason as they have sold off heavily in equities in the last two trading session, FIIs have been buying steadily though their activity has slowed down.
One of the apparent reason is the Reliance Power IPO, India's biggest IPO so far, which opened for subscription on January 15, 2008. The size of the IPO is about 3 billion dollars and it got fully subscribed within minutes of its opening. The excitement about the IPO has lead to it getting more than 10 times offer for subscription on the first day itself. This is remarkable considering the size of the issue. About 27 billion dollars have shifted to Reliance Power and it appears that a substantial part of it has been coming from the stock markets. There is a craze for IPOs and this has led to spectacular performance of the IPOs in the last year. Moreover, at levels above 6300 for Nifty many investors don't see any significant upside and have taken their money from stock market to the IPO which has higher chances of giving them 40-50% returns on listing.

Biggest bull run of FII in India in 2007

Foreign Institutional Investors (FII) are very bullish on India. The amount of FII money inflow in the first half of FY07-08 itself broke earlier records. According to an estimate available on Reserve Bank of India's (RBI) website the net FII inflow during April 2007 to September 2007 was a whopping $15.5 billion. This itself was enough to break previous records but the inflow trend is still continuing. The stock markets have witnessed a bumper rally because of this extra money from outside coming into the markets and the BSE-30 index, Sensex, has given returns in excess of 50% in last one year.