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NEW DELHI : Fears of aggressive interest rate hikes by the US Federal Reserve following unexpectedly high inflation in the world’s largest economy lashed global stock markets on Thursday, sending Indian benchmark indices crashing by 2.22%.

While the BSE Sensex index plunged 1,158 points to close at 52,930.31, the broader Nifty index fell 359 points to close at 15,808. The fall in equities was accompanied by a weakening of the rupee, which hit a record low of 77.63 against the dollar on similar concerns. India VIX, or the fear index, shot up 6% to hit a seven-week high, indicating that uncertainty may continue for some more time.

Steep decline
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Steep decline

“Inflation continues to be a major concern for the markets," said Siddhartha Khemka, head, retail research, Motilal Oswal Financial Services Ltd. “Weakening economic growth outlook, the prolonged Russia-Ukraine war, volatility in commodity prices, continued FII selling and rising bond yields have dented investors’ sentiments. Nifty has corrected by 15% from its 52-week high. On the other hand, Nifty Midcap 100 and Smallcap 100 indices saw deeper cuts—down 19% and 28% from their respective highs, entering a bear grip," Khemka said.

On Thursday, the Dollar Index touched a 20-year high of 104.5, and the Nifty is now retesting its March low of 15,671, which analysts said can further add to the downside. However, they said, equity markets are currently in the oversold territory after the sharp declines in the past few trading sessions.

Official data released later in the day showed April retail inflation at an eight-year high of 7.79%. Besides, growth concerns in China due to covid restrictions, and the ongoing conflict in Ukraine that has led to supply-side bottlenecks, are expected to weigh heavily on investor sentiments in the foreseeable future.

“USD-INR spot touched a fresh all-time high of 77.62, after higher-than-expected inflation print in the US pushed the Dollar Index to a fresh 20-year high. Weakness in equities was an add-on force for the dollar," said Anindya Banerjee, vice-president, currency derivatives and interest rate derivatives at Kotak Securities Ltd. “We suspect RBI may have sold dollars to stem the decline in the Indian rupee," added Banerjee. Along with the Nifty and the Sensex, the global markets corrected significantly on Thursday, as other Asian indices such as Taiwan TAIEX, Nikkei, Jakarta Composite, Shanghai Composite and Hang Seng all ended 0.12-3.14% % lower on Thursday.

In India, foreign portfolio investors remain net sellers, having sold 1.48 trillion worth of equity in 2022 till 11 May. This is adding to pressure on the rupee and the markets. Meanwhile, Brent crude at $106.14 is eroding corporate margins.

“The pressure of increased inflation on corporate earnings is quite visible since the last two quarters and is expected to continue for another 1-2 quarters," said Sushant Bhansali, CEO, Ambit Asset Management. This, he said, is also leading to earnings getting downgraded more than being upgraded.

“The mix of earnings downgrade, along with a reversal of the interest rate cycle, is increasing volatility...we are in the consolidation phase after the big bull run in the last two years, a much-needed breather," he added.

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