Factors that contributed for the market correction today

1. Rising political tension between India and China punctured the morning momentum on today. According to reports, the situation in Eastern Ladakh flared again on the intervening night of August 29/30 when troops of China's People's Liberation Army (PLA) violated the "previous consensus" arrived at during military and diplomatic engagements. Following the development, the Srinagar-Leh highway has been closed for civilians, according reports.

2. Though there was across-the-board selling, financial sector stocks corrected the most today with the Nifty Bank index, a gauge of the performance of private banks on the National Stock Exchange (NSE) falling over 3 per cent. A similar fall was visible in auto and real estate indexes. Federal Bank and RBL Bank (down over 6 per cent each); Bosch, Motherson Sumi and Eicher (down 5 – 7 per cent); and DLF, Sobha, Prestige Estates (down 5.5 – 7 per cent) were among the top losers in the rate sensitive pack.

3.With inflation likely to remain elevated and uncertainty on the trajectory, analysts expect the monetary policy committee (MPC) of the Reserve Bank of India to keep policy rates unchanged. “This could also cap incremental liquidity easing measures (OMOs/monetisation), which markets have been pricing in given the government borrowing overhang,” says Upasna Bhardwaj, economist and senior vice-president at Kotak Mahindra Bank.

4.Profit booking in mid-and small-caps: Mid-and small-cap indexes lost 3.8 per cent and 4.1 per cent, respectively as compared to 2.7 per cent fall in the S&P BSE Sensex in late noon deals.

"Our worry is compounded by the fact that valuation bubbles are created in several small and mid-cap (SMC) stocks by retail investors. Many small stocks without any revenues for over three years have also rallied to record levels. Once 'smart investors' take out their profits in such SMC stocks, the domestic market could see some pain," cautions G Chokkalingam, founder and chief investment officer at Equinomics Research.

5. Market participants also took home some profits ahead of the data for April – June 2020 quarter gross domestic product (GDP) to be released today post market hours. Economists project GDP might contract 19.2 per cent in the April-June quarter from a year ago, the sharpest decline since the nation started publishing quarterly figures in 1996.

“For Q1FY21, we expect the statistics office to announce a GDP contraction of around 17.5 per cent y-o-y,” wrote Pranjul Bhandari, chief economist at HSBC Securities and Capital Markets in a recent co-authored note with Aayushi Chaudhary.

New margin rules: New margin rules are set to kick-in from Tuesday, September 1. Markets regulator Securities and Exchange Board of India (Sebi) will again meet stock brokers’ association, depositories and clearing corporations on Monday to analyse the readiness to implement new rules on margin pledge from September 1. Reports suggest brokers are not technically prepared to roll out the proposed framework and are seeking a month’s extension to implement the same.