For a market that rose 14 months without a pause, Friday’s ‘mini-tremor’ felt like an earthquake.

The Sensex, India’s key equity gauge, fell 900 points (2.5 per cent) just a day after Finance Minister Arun Jaitely announced his government’s last full Budget before the 2019 general elections. The imposition of a Long-Term Capital Gains tax (LTCG) on equities has been blamed for the fall, but experts say a dramatic correction in stock prices was long building up.

Efforts by Revenue Secretary Hasmukh Adhia to calm the markets by detailing the positives of the “grandfathering” clause under the LTCG regime did not cut much ice.

“Friday’s fall is a drop in the ocean,” said Rahul Arora, CEO, Institutional Equities, Nirmal Bang. “A stupendous bull run in the Sensex saw the index double in four years. That taste, of complacency, needs to be slapped out of your mouth.”

The Sensex, he added, “was flying blind and may be discounting corporate earnings for financial year 2021 or even 2022. Either earnings catch up dramatically by compounding 20 per cent or the Sensex corrects around 20 per cent.”

Just last week, Dalal Street was cheering the fastest 1,000-point rise in the Sensex to 36,000 in six days. On Friday, the index fell back to 35,000 in just one trading session.

At close on Friday, the Sensex stood at 35,066. The broader index Nifty fell 256 points (2.33 per cent) to close at 10,760. Much of market fall came after Europe markets opened for trading at around 1:30 pm.

The fall in small- and mid-cap stocks was brutal. The BSE Mid-cap index crashed by 4 per cent and the small-cap index plummeted nearly 5 per cent. A few stocks even fell 15-40 per cent and PC Jewellers crashed 55 per cent in intra-day trade.

“The fact that Friday’s fall failed to evoke extreme reactions among investors, who are still expecting calm to return sooner to stock market, makes me think that the pain could continue for a few more days or weeks,” said Rohit Srivastava, fund manager, Sharekhan BNP Paribas.

“Investors are complacent about basic ideas like valuations and other overbought indicators that are flashing red. Eventually, the pain could be much deeper in wider stock portfolios.” According to a foreign fund manager, investors were also taking note of the results from the Rajasthan byelections on Thursday, which the Congress swept convincingly, and concluding that the BJP may not be invincible in the 2019 general election.

Globally, equity markets are wobbling as a result of a sharp spike in bond yields in the US and Europe above their key threshold levels. This put pressure on the Indian equity market too, while the LTCG tax and the lack of an effective stimulus package to revive growth were proximate triggers.

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