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MUMBAI /DELHI: After months of sustained outperformance, domestic stocks bore the brunt of a global stock market rout led by FPI selling amid mounting fears of an interest rate-induced global recession and a sharp cut in India’s FY23 GDP growth forecast by Fitch.

The double whammy led the Nifty and Sensex to fall the most in three months on Friday, wiping out Rs6.25 lakh crore worth of investor wealth.

FPI selling of 3260 crore (provisional) of shares amid FTSE rebalancing dragged the Nifty down 1.94% or 346.55 points, to 17530.85, breaching important supports of 17700-17800. The Sensex tumbled by 1.82% (1093 pts) to 58840.79 points. The rupee fell by 4 paise to the USD at 79.74.

The increasing volatility ahead of next week’s US Fed meet, where markets have begun penciling in the possibility of a 100-bps hike, was underscored by fear gauge India Vix rising by almost 8% to an over three-month high of 19.82. A reading above 22 signals overbought conditions while one below 14 indicates an oversold market.

“The World Bank painted a gloomy picture of the global economy heading toward deep recession (in 2023), as central banks across the world simultaneously hike interest rates to combat persistent inflation," said Aishvarya Dadheech, fund manager, Ambit Asset Management. “Fitch especially cut India’s economic growth forecast for 2022-23 to 7% from 7.8%. All this fueled the jitteriness and led to a surge in the fear index (VIX) above 20 (intraday), for the first-time post-June 2022."

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Dadheech expects the market to remain volatile in the coming weeks before more cues emerge from the ensuing quarterly earnings season, which begins early next month.

Markets in the US have discounted a 75 bps hike but analysts from Nomura expect a full percentage point hike because of upside risks to inflation. Ambit’s Dadheech said to cushion the impact of a probable jumbo rate hike on the rupee, the MPC might have to hike the repo rate by 50 bps “soon." The two-day MPC meet, following September 20-21 FOMC meet, concludes on September 30.

Friday’s carnage was felt more in the broader markets, which underperformed the benchmark indices.

The Nifty Midcap 100 index fell 2.84% to 31,495 while the Nifty Smallcap 100 fell 2.56% to 9,817. The only silver lining in an otherwise gloomy session was the relative outperformance of the Bank Nifty, which fell 1% at 40,776.8.

Analysts have advised investors to buy on dips as India’s relative outperformance to EM and AE peers could continue. While MSCI India generated gross returns of 6.3% in the three months through August 31, the MSCI EM index, comprising China, Korea and Taiwan, gave a negative gross return of 6.29%.

“The current setup is a ‘Buy on dips’ market, and investors should use volatility in the coming weeks in a phased manner to build a position with a view of 12-18 months in quality companies where earnings visibility is very high. In this context, domestic-oriented themes like Banks, FMCG, Hospitals, Domestic Industrials, and Discretionary consumption are well placed over export + cyclical-oriented themes," said Neeraj Chadawar, head - Quantitative Equity Research, Axis Securities

“As global investors brace for a further interest rate hike post the US inflation data released recently, the RBI too has its task cut out in India when its rate setting committee meets at the end of this month," said S Ranganathan, Head of Research at LKP Securities. (a) Spectacular Monsoon coupled with several positive tailwinds provides a plethora of investment opportunities in the broader markets."

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