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Soaring inflation, sporadic lockdowns and a surge in global bond yields whipped stocks on Monday, with the benchmark indices dropping sharply in intraday trading before recovering some of the losses.

The Sensex lost 397 points, or 0.78%, to close at 50,395.08, and the Nifty shed 101.45 points, or 0.67%, to close at 14,929.50. During the day, the Sensex fell as much as 1.96% and the Nifty 1.90%.

Market sentiments were impacted by both global as well as domestic factors. On the global front, US G-Sec yields spiked to a 12-month high of 1.62% and continued to dampen sentiments. On the domestic side, February retail inflation surged to a three-month high, while the WPI (Wholesale Price Index) surged to a 27-month high. This, along with the increase in covid-19 cases, weighed on markets," said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services Ltd.

The Sensex dropped sharply in intraday trading before recovering some of the losses on Monday
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The Sensex dropped sharply in intraday trading before recovering some of the losses on Monday

While the long-term structure of the market remains positive, stocks may face some hurdles in the near term due to these concerns, Khemka said.

India’s WPI-based inflation surged to a 27-month high of 4.17% in February, while retail inflation rose to 5.03% from a 16-month low in January. Factory output contracted 1.6% in January.

Analysts said the macro data suggest economic recovery will take some more time, and the central bank may start normalizing interest rates due to high inflation. “The loss of momentum in industrial production reinforces our belief that economic recovery remains at a nascent stage. Downside risks may arise in case broader lockdowns are reintroduced in response to the rising number of covid cases," a Kotak Institutional Equities note said on 12 March. It added that given the upside risk to headline Consumer Price Index (CPI) inflation and an adverse global backdrop, the Reserve Bank of India’s policy normalization may begin from the second half of 2021.

Meanwhile, the US Federal Open Market Committee (FOMC), which sets policy rates in the world’s largest economy, is due to meet on 16 and 17 March. It is expected to upgrade its GDP forecast, following a $1.9 trillion fiscal stimulus package that will send direct payments of up to $1,400 to most Americans.

The steady inflow of foreign money, which has kept stock markets buoyant since March last year, stems, in part, from the Fed’s decision on interest rates. India has been a huge beneficiary of the inflows of foreign institutional money reaching emerging markets, especially during the pandemic. For instance, FIIs have bought Indian shares worth $28.35 billion in the financial year 2021 so far.

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