Morgan Stanley today downgraded Indian equities to equal-weight from overweight due to expensive valuations, and said it expects the market to consolidate ahead of potential “short-term headwinds”.

Relentless selling by FIIs is a key reason for this correction in the market, say analysts.  FIIs had sold over ₹10,000 crore in Indian equities in past five sessions.

“There is some exuberance in terms of valuations in certain pockets of the market. In some pockets, there is still money to be made, which will see some sectoral churn,” said Saurabh Jain, assistant vice president at SMC Securities.

The broader markets too were under selling pressure with BSE midcap and smallcap indices down about 1.5%.

Santosh Meena, Head of Research, Swastika Investmart, said: “We are seeing the first meaningful correction in the market where Nifty has slipped below its 20-DMA that has opened the door for further downside where rising 50-DMA will be the next support level that may coincide with gap area around 17650 level while below this, 17450-17250 will be the next support zone. On the upside, 18150-18300 has become an immediate supply zone.”

“Inflation and slow down in global growth momentum are other concerns amid expensive valuations. The rise in fresh covid cases in some of the countries is also disturbing the mood of the investors. We are in a structural bull market where intermediate corrections will be a part of this journey and these kinds of corrections will provide good buying opportunities in quality stocks,” he added. 

“Bank Nifty is also showing signs of topping out from the 41500 level where it has slipped below the sacrosanct level of 40000. On the downside, 39250 will be an immediate and important support level that may coincide with rising 20-DMA; below this, we can expect further weakness towards 38000-37700. On the upside, 40500-41000 will act as a strong supply zone,” said Mr Meena of Swastika Investmart.

Adani Ports is abandoning its plans to build a container terminal in Myanmar, pushing shares down about 7% today.

“We expect the market to be volatile in the coming weeks and we expect selling pressure to continue in the broader market. We suggest investors be cautious on the market, look for profit booking and avoid buy on dip strategy,” said Yash Gupta, Equity Research Analyst, Angel One.

Shares slipped today in Europe and Asia after a retreat on Wall Street pulled the S&P 500 and the Dow Jones Industrial Average back from their latest record highs.

Investors will get an update on U.S. economic growth when the Commerce Department releases its report on third-quarter gross domestic product later today.