It would be an understatement to say that the bears had the upper hand for most parts of 2016. Heavy domestic turbulence and extraordinary reactions to overseas news kept the markets grounded whenever it threatened to break out.
A February to forget
The indices’ performance in the first few months was a portent of things to come. By mid February, the Sensex had fallen by over 3,000 points, largely due to weak quarterly earnings and falling crude oil prices. Other domestic factors such as mounting non-performing assets (NPAs) also weighed on the minds of the investors. The second week of the month saw the Sensex taking its biggest hit — a fall of over 6 per cent.
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| Week | Price | Open | High | Low | Change % |
| First | 24616.97 | 24982.22 | 25002.32 | 24187.54 | -1.02 |
| Second | 22986.12 | 24637.41 | 24698.95 | 22600.39 | -6.62 |
| Third | 23709.15 | 23223.43 | 23774.48 | 22920.84 | 3.15 |
| Fourth | 23154.3 | 23783.47 | 23855.04 | 22948.1 | -2.34 |
The period also saw foreign institutional investors (FIIs) pulling out about Rs. 17,000 crore from the equity market.
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The first overreaction
Post February, the indices managed to keep the investors on the edge but a correction ensued. The first shocker of the year — the Brexit vote results — sent the market into a frenzy. The United Kingdom had voiced its opinion to 'leave' the European Union. On June 24, the Sensex shed over 600 points and the Nifty bled 180 points. The fall was not just restricted to companies having exposure to the U.K. market, such as Tata Motors, Tata Steel, Infosys, Bharat Forge and Tech Mahindra.
The panic selling seen across sectors was one of the biggest overreactions this year, so much so that Finance Minister Arun Jaitley and the then RBI Governor Raghuram Rajan had to intervene to soothe the nerves of retail investors. Even cautious retail investors ran for cover as FIIs sat on the sidelines and the domestic institutional investors (DIIs) continued to sell. Mr. Rajan downplayed the reaction, saying, “The economy itself is on a stronger growth path than elsewhere and after the initial concern of Brexit, people will look around for places that are relatively less affected. We stand out as a reasonable prospect and after the initial concern, money should return here." The FIIs managed to keep their investments to a minimum in the month of June but DIIs seemed more wary of the market conditions. In the month of June, FIIs invested about Rs. 4,000 crore but DIIs sold about Rs. 2,200 crore.
Passage of GST Bill fails to inspire
Billed as the biggest tax reform since Independence, the GST Bill was passed by the Rajya Sabha on August 4. The GST is aimed at replacing a string of local levies with a single tax to turn the country into a unified market. It was believed that passage of the Bill would finally trigger some positive sentiment but the indices remained range bound.
In the following month, the Sensex inched towards the 30,000 mark, a level that it had first hit in March 2015. The Nifty was making steady gains to cross 8,700 levels. But, the eighteen month-high levels were short lived. In the last days of the month, an announcement of surgical strikes on terror launch pads across the border sent an already weak market into a tailspin.
On September 29, the Sensex recorded a fall of over 400 points and the Nifty ended 1.76 per cent lower, at 8.591.25. FIIs and DIIs, however, lapped up the opportunity, investing Rs. 3,413 crore and Rs. 1,630 crore, respectively. It is interesting to note that the Karachi KSE 100 ended only 0.15% down after initial losses on the same day. The Indian market just had its second overreaction of the year.
The two Ds that derailed the momentum
Just when the investors thought that the year couldn’t get any worse, came two announcements that effectively shut the door on any possibility of a recovery.
On November 8, Prime Minister Narendra Modi, in a televised address at 8.00 p.m., announced that Rs. 500 and Rs. 1,000 notes would cease to be legal tender from midnight. Next day, the markets were put to one of their biggest tests of the year. It had to react to two announcements — the results of the U.S. presidential election and Mr. Modi’s demonetisation move. On November 9, by noon, the Sensex had plunged by about 1,600 points but the markets couldn’t afford another overreaction. It later staged a smart recovery to end at 27,253, over 330 points below the opening level. The Nifty settled 112 points lower, at 8,432.
In the following days, the victory of Donald Trump and the demonetisation of higher currency notes were met with fear, fuelled by lack of clarity on the way forward. In the next 15 days, FIIs sold about Rs. 18, 000 crore. In the same period the DIIs bought over Rs. 15,000 crore. And, between all this, the rupee slumped to a record low of 68.87 to a dollar.
Monthly FII investments in Rs. crore (Source: NSDL)
| Month | Buy/Sell |
| January | -11,126 |
| February | -5,521 |
| March | 21,143 |
| April | 8,416 |
| May | 2,543 |
| June | 3,713 |
| July | 12,612 |
| August | 9,071 |
| September | 10,443 |
| October | -4,306 |
| November | -18,244 |
| December (till 26th) | -3,744 |
Even banking stocks that saw investor interest on the back of the demonetisation initiative lost significant ground in the month. By end of November, the Sensex was hovering near 26,450, over 1,350 points down, over uncertainty about the economic impact of demonetisation. The Nifty had shed 420 points in the same period to end the month at 8,208. Since then, the overall movement has been downward. People waiting for a recovery after the disastrous November have been made to wait longer as there’s no sign of immediate relief. With demonetisation set to hit fourth quarter earnings, markets might see further downside as it enters 2017.