Equity benchmark indices Sensex and Nifty have been falling for four days in a row. Today’s sell-off was particularly severe, as the sustained downtrend appears to have led to a vicious cycle with falling prices prompting more investors to sell out in panic. The Sensex closed at 58,465.9, down 1,170.1 points or two percent over its previous close, after hitting a low of 58,011.9 intra-day. It has now fallen 2,252.8 points over the last four sessions. The Nifty tumbled 348.3 points or two percent to close at 17,416.6. It has shed 692.9 points over the last four sessions.

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Here are some of the factors that have contributed to the steep decline in indices over the past week:

Valuations

: After a near one-sided rally over the last 18 months, Indian equities have become expensive. According to top foreign brokerages, the Sensex and Nifty are trading anywhere between 25 and 30 percent one-year forward earnings, which is far ahead of their historic valuations. The estimates for forward earnings vary across brokers, depending on the sectors they include or exclude.

Many foreign broking firms have downgraded their ratings on the Indian market over the last month, and have advised their international clients to book profits.

Fed tapering: The US Federal Reserve has said that it will start trimming its monthly bond purchases this month, and end the purchases altogether in 2022. This means less liquidity in global markets, which in turn could reduce allocations by foreign investors to markets, including India.

Costly crude: Crude oil prices have eased a bit of late, but remain above India’s comfort zone. “India imports 83 percent, 56 percent, and 30 percent of its oil, gas and coal consumption, respectively. Acutely high energy prices are typically consistent with the erosion of India’s external position, sustained episodes of rupee weakness, and ultimately Indian equities’ underperformance,” says a CLSA report.

Inflation: Inflation globally has remained high with supply chain blockages and labour shortage being the main reasons. So far, most central banks have said that high inflation is temporary. But many investors believe that inflation is unlikely to subside anytime soon, and that could result in central banks hiking interest rates.

Risk-off strategy: Expectations of an earlier-than-expected hike in interest rates by the US Fed could prompt many global investors to move a part of their assets out of risky assets like emerging market equities, into US treasury bonds. This spells troubles for emerging markets in general, including India, which has outperformed most of its peers in 2021.

Disappointing debut by Paytm: The sharp fall in Paytm’s stock in two days since listing has hurt retail investor sentiment. On the positive side, this could prod companies into pricing their IPOs reasonably, but at the same time, it could also make investors wary of putting money in new issues.

Repeal of farm laws: While this does not have a direct bearing on equity valuations, it has come as a sentiment dampener in a weak market. The government’s decision has led to concerns about the fate of other more difficult reforms.