Rate hike fears over high inflation buffet markets

Indian stocks saw a sharp decline on Wednesday, mirroring a similar trend in the US markets, with the benchmark indices Sensex and Nifty each falling more than 1.5% as investor sentiment soured because of the continued uncertainty over future rate hike decisions by the US Federal Reserve.

The BSE’s Sensex slipped below the 60,000 mark, and the National Stock Exchange’s Nifty ended at its lowest level since 20 October at 17,554, as investors grappled with recent economic data from the US and Europe. Slow disinflation rates indicated by recent economic data suggest that the Fed may continue to raise rates longer than previously anticipated, experts said.

Shrikant Chouhan, head of equity research (retail) at Kotak Securities Ltd, said that the overnight slump in the US markets shook Indian markets badly as heavy selling across the board saw Sensex crash nearly 1,000 points.

Markets were already range-bound with a negative bias in the last few sessions, and today’s sharp fall could further accentuate the concerns of rising interest rates going ahead, higher inflation, and slowing global growth, he added.

By closing below 17,604, Nifty has made a new lower bottom on the daily line chart, which indicates the continuation of a bearish trend, said Devarsh Vakil, deputy head of retail research at HDFC Securities.

A protracted hawkish stance by the Federal Reserve could potentially lead to the Reserve Bank of India (RBI) also keeping interest rates high. According to Acuité Ratings & Research, RBI is likely to continue with monetary tightening due to the stubbornly high levels of core inflation. As a result, there could be another 25-basis-point hike in April 2023, and RBI may adopt a data-dependent approach to its stance.

All sectoral Indices ended with steep losses. Nifty Metal, Media, PSU banks, energy, infrastructure, and commodities fell the most. Adani group stocks continued their decline, led by a steep fall of more than 10% in Adani Enterprises Ltd. The rest of the nine Adani group stocks fell 4-6.25%. The group has seen a market cap erosion of more than 60% since 24 January after US short-seller Hindenburg Research released a report alleging corporate malfeasance against the conglomerate. The Adani group has denied any wrongdoing.

Meanwhile, Russian and US presidents’ statements led to an increase in geopolitical tensions and further brought uncertainty into the equity market, said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services Ltd.

The resurgence of the Cold War between the US and Russia has brought apprehension in the market, said Vinod Nair, head of research at Geojit Financial Services. Although it should be a short-term effect, the fear of sanctions against Russia and its degree of implication on the economy, especially on food and oil exports, is adding to the anxiety, added Nair, Nair said.

Meanwhile, the volatility index (India VIX) surged 11% to 15.6. Nifty has now fallen almost 3% in the last five days. “We expect the market to remain weak for the next few days amid monthly derivatives expiry and an increase in global volatility,” Khemka said.

The rupee at 82.85 to a dollar depreciated by about five paise due to the weakness in equity markets. But the reaction was muted due to suspected intervention from the central bank, said Anindya Banerjee, vice president of currency derivatives and interest rate derivatives at Kotak Securities Ltd. He expects the rupee to trade in a range of 82.50 and 83.24 against the dollar on the spot market.