The fall was largely led by banking and interest rate sensitive stocks that saw huge unwinding from domestic and foreign institutional investors, as the central bank's measures are expected to impact the banks growth and margins, thereby having a negative impact on earnings.
According to stock exchange data, FIIs sold $86 million, while DIIs sold Rs 596 crore ($11 million) of Indian equities in the week ended July 26 compared with net outflow of $34.49 by FIIs and R299 crore ($5.01 million) by the DIIs in the preceeding week.
On Friday, Indian equities ended down for the third consecutive session. The Sensex lost 0.3%, or 56.57 points, to end at 19,748.19, while the Nifty settled at 5,886.2, down 21.3 points, or -0.36%. For the week, the 30-share gauge lost 2%, while the broader Nifty lost 2.4% from the previous week.
Financial services firm IDFC was the biggest loser in the banking, financial services and insurance (BFSI) space. The scrip lost over 8% after US financial services major Morgan Stanley downgraded the stock and lowered its price target, citing weak loan growth outlook. Other losers in the space included Punjab National Bank (5.9%), IndusInd Bank (5.6%), HDFC Bank (5.3%), ICICI Bank (2.9%) and State Bank of India (2.5%).
Other rate sensitives felt more pain as analysts said short-term cost of borrowing would spike in the near term. JP Associates was the biggest loser this week (-16%) followed by Ambuja Cements (-14.1%), Larsen & Toubro (-13.2%), Sesa Goa (-10.2%), Jindal Steel & Power (-9.7%) and Tata Steel (-9.2%).
Kotak Mahindra Bank chief economist Indranil Pan said additional liquidity tightening measures would put pressure on the banking sector, forcing banks to raise deposit rates and base rates, which will, in turn, have implications for the real economy.
The measures are much harsher than the market expectations of a CRR hike. Implications of these measures would increase the borrowing costs of all businesses and overall lead a further slowdown in economic activity, Pan said in his research note. With its recent liquidity tightening measures, RBI has joined the central banks of nations like Brazil and Indonesia in implementing such policies to check currency volatility.
Positively, the Indian rupee gained for the third straight week the longest winning streak since February. The currency has advanced 0.6% this week to 58.9875 per dollar compared to 59.35 in the previous week. The rupee touched its all-time closing low of 60.615 on July 8.
Shares of fast-moving consumer goods (FMCG) also took a beating on disappointing first quarter results and fears that the consumer staples business is headed for a slowdown. Shares of Hindustan Unilever (HUL) lost 2.3% this week, while that of ITC declined 0.3% as topline and volume growth fell below Street expectations. Others like Nestle India, Colgate Palmolive and United Breweries lost 3-14% this week.