It was a manic Monday for the equity markets, as the benchmark Sensex and Nifty50 indices plunged more than 2.7 per cent, tracking a rout in global markets as investors feared the higher-than-expected US inflation would drive the Federal Reserve to get even more aggressive in terms of monetary tightening.
Globally, central banks have been raising interest rates in recent months in a bid to tame a surge in inflation. This has put stocks under pressure, strengthened the dollar, and there has been a massive pullout from emerging markets by foreign institutional investors.
Last week, the Reserve Bank of India raised the repo rate by 50 basis points (0.50 per cent) to 4.90 per cent. It had earlier raised the repo rate by 40 basis points in May. The US Fed, which meets later this week, is expected to raise interest rate by at least 0.5 per cent. Last month too, it had raised the Federal funds rate by 0.5 per cent.
That apart, the continued geopolitical uncertainties, fresh round of mass-testing in major Chinese cities raising worries over possibilities of further lockdowns also weighed on stocks.
On Monday, the BSE Sensex fell 1,456.7 points or 2.7 per cent to close at 52,846.70 points. The NSE Nifty50 index ended 427.4 points or 2.6 per cent lower at 15,774.40 points. The mid cap and small cap indices were also down around 3 per cent.
Elsewhere, major stock market indices like the Nikkei 225 in Tokyo, Hong Kong’s Hang Seng slumped over 3 per cent, and European stocks were also down over 2 per cent. On Friday, the Dow Jones Industrial Average as well as S&P500 indices in the US had also tumbled close to 3 per cent.
“Domestic equities witnessed a steep fall on account of weak global cues and India’s inflation data, scheduled post market hours. Global markets saw sharp sell-off after US consumer inflation for May accelerated to a four-decade high of 8.6 per cent. Further, US treasury yields too inched up to 3.24 per cent (four-year high), which fuelled fears of aggressive interest rate hikes by Federal Reserve in its policy meet scheduled on June 14-15,” said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services.
Brent crude oil prices have risen above $120 a barrel over the last week. While the US dollar strengthened, the rupee hit a fresh low of 78.28 on Monday. The dollar strengthening will not augur well for India, which imports around 85 per cent of its its crude oil requirements. Given that India’s trade deficit is already high, high oil prices will be a worry. The weak economic parameters will weigh on investors, say analysts.
“The narrative will now shift to the fragility of macro-economic indicators. The fisc is weakening (high fiscal deficit), current account will be in tatters, the rupee will be under pressure (due to sustained FII outflows)… If oil were to remain at current levels or surge to around $140 a barrel, then I won’t be surprised if the market (Nifty50) were to fall to around 14,000 level or lower,” said Ajay Bodke, an independent market analyst.
Equity markets world-wide had seen a massive bull run since April 2020, which was fuelled by huge monetary policy stimulus by global central banks. However, the central banks tightening their policies to tame inflation has charged up the bears.
So far in 2022, foreign portfolio investors have sold a massive Rs 1.84 lakh crore from India’s equity markets and another Rs 15,735 crore from debt markets.
On Monday, 29 of the 30 stocks on the Sensex ended in the red. Banking and technology stocks were among the biggest losers. Bajaj Finserv and Bajaj Finance slumped 7 per cent and 5.4 per cent respectively, Indusind Bank fell 5.3 per cent, ICICI Bank was down 4.5 per cent and SBI fell around 3.4 per cent. Infosys, TCS, Tech Mahindra and Wipro fell 3 per cent to 5 per cent.
“Near-term market outlook remains weak on the back of twin global headwinds of high inflation and increasing interest rates. On the domestic side, depreciating rupee and consistent FII selling are aggravating the pressure on markets,” said Khemka of Motilal Oswal.
The only gainer on the Sensex today was Nestle India, which rose 0.5 per cent.
Bodke pointed that during high inflationary times, physical assets, which usually act as a hedge against inflation tend to outperform financial assets.