Horror show on Dalal Street as US, Japan spook investors

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₹15.4 trillion. Domestic institutions stepped up to counter sales by foreign investors; however, profit-taking by investors who route money directly into markets worsened Monday's fall. How retail investors behave from now—through mutual funds and direct investments—will be key to ascertaining whether Indian markets can outperform global peers, market experts said.

“While headline indices trade at fair value, mid-caps and small-caps trade way above their historic valuations and could face the music for longer, unless non-institutional investors, routing funds directly or through mutual funds, restart buying," said Sanjeev Prasad, co-head, Kotak Institutional Equities. The yen carry trade—borrowing in cheap yen and investing in higher-yielding assets in other markets—is unwinding after the Bank of Japan last week hiked a short-term interest rate to 0.25% from 0-0.1%, the most in 16 years. This has strengthened the yen against the dollar, forcing investors leveraged by yen to unwind trades globally.

Meanwhile, unemployment in the US rose to a near three-year high of 4.3% in July, raising concerns of a recession. The benchmark Nifty and Sensex fell by 2.7% each to 24055.6 and 78759.4, while the Nifty Midcap 150 and Nifty Smallcap 250 tanked by 3.5% and 4.18%, as FIIs sold shares worth a provisional ₹10,073.75 crore. Provisional buying of ₹9,155.55 crore by domestic institutions was just enough to help markets recover from the day’s lows.

The pullback wiped out ₹15.41 trillion of investor wealth, the worst since 4 June’s ₹31.06 trillion erosion on election results day. The rupee fell to a record low of ₹83.85 to the dollar, thanks to FII outflows. While the Nifty appears reasonably valued, trading at a one-year forward price