Markets log first decline of ’22 as Fed adopts hawkish stance

Markets snapped a four day gaining streak on Thursday dragged by weak global cues, marking the first decline of Indian equities in 2022. Indian markets joined other equities in Asia-Pacific region in a sell-off, extending a global slump after US Federal Reserve meeting minutes pointed to a faster-than-expected rise in interest rates due to concerns about persistent inflation. Growing concerns about surging covid case in India with partial restrictions on mobility has weighed on investor sentiment.  

The BSE Sensex was down 621.31 points or 1.03% ending at 59,601.84. The Nifty slipped 179.35  points or 1% at 17,745.90.  

Both Asia and Europe's markets fell heavily after Wall Street's tech-heavy Nasdaq plunged more than 3% on Wednesday and 2- and 5-year Treasury yields, important drivers of global borrowing costs, surged to post-COVID pandemic highs. In Japan, the Nikkei declined 2.88% while South Korea’s Kospi fell 1.13%.  

Minutes from the Fed's December meeting showed that a tight jobs market and unrelenting inflation could require the U.S. central bank to raise rates sooner than expected and begin reducing its overall asset holdings - a process known as quantitative tightening (QT). The minutes showed that Fed officials were uniformly concerned about the pace of inflation, which promised to persist, alongside global supply bottlenecks, "well into" 2022.

 “Global markets were wounded by heavy selling as Fed meeting minutes pointed to a faster than expected policy rate hike considering elevated US inflation levels. Investors are also watching the fast spread of covid cases and stricter restrictions being imposed as it would keep the market highly volatile in the coming days,” said Vishal Wagh, Research Head, Bonanza Portfolio Ltd.  

As India braces for covid third wave, Radhika Rao, senior economist, DBS Group feels that an unfavourable global environment coupled with caution over a heavy fiscal borrowing pipeline, liquidity withdrawal, rise in oil prices and lack of direct support from the central bank has driven 10 year rupee yields to near 20-month highs, past 6.5%.  

 “The Reserve Bank of India (RBI) policy commentary in December pointed to the preference for a gradual road towards policy normalisation. Guidance reinforced that the MPC’s priority is to secure growth impulses and preserve policy room to meet this objective, diverging from the global policy shifts, particularly the US Fed. Even as inflation risks were highlighted on imported pressures and volatility in food, ‘flexibility’ in the price stability mandate will see the recovery path dictate policy direction,” Rao said.  

Analysts at Reliance Securities are optimistic that an all-round calibrated economic recovery is on the cards, though the timing remains highly uncertain. "Our year-end 2022 target for Nifty is 20,000 at 22 times FY24 earnings. We expect Nifty to enjoy premium valuation for the next 1-2 years on the back of higher earnings CAGR (before reaching stable earnings pace of growth), as India becomes a preferred destination for global manufacturing, going ahead. This trend would continue over the next 4-5 years, supported by China+1 policy and the government’s support for various industries. Our 2022 year-end target of 20,000 for Nifty implies a 13% return from the current levels," said the brokerage firm.