High US inflation singes Indian markets: stocks down 2.7%, Re below 78 to USD

Domestic equities joined the global sell-off with the benchmark Sensex plummeting 2.68 per cent or 1,457 points to close at 52,846.70.

The Nifty index fell 2.64 per cent or 427 points to close at 15,774.40 as fears of higher capital outflow marred investor sentiment. (Representational)

A FOUR-decade high inflation in the US triggered concerns about aggressive rate hikes by the Federal Reserve and singed stock and currency markets in India. Domestic equities joined the global sell-off with the benchmark Sensex plummeting 2.68 per cent or 1,457 points to close at 52,846.70. The Nifty index fell 2.64 per cent or 427 points to close at 15,774.40 as fears of higher capital outflow marred investor sentiment.

The rupee also plunged against the US dollar below the 78-mark to hit a low of 78.29, recovered a bit during the day, but still closed at a record low of 78.13. The yield on India’s 10-year benchmark bond rose 8 basis points to 7.60 per cent, signalling the upward pressure on interest rates in the banking system.

Foreign portfolio investors pulled out Rs 4,164 crore from Indian stocks on Monday. Tech, bank, metals, and realty stock indices fell by over three per cent in the selling avalanche. LIC shares fell 5.85 per cent to Rs 668.20 as anchor investors unloaded the shares after the lock-in period ended.

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Read | Retail inflation eases a bit, but still over 7%

Analysts said domestic and global worries are hurting the sentiment in India. The withdrawal of liberal accommodative policies in India and other countries, mainly the US, is prompting the investors to press the sell button. Capital outflows by FPIs are likely to continue in such a scenario where the rise in US interest rates will attract foreign investors back to their home country.

The rise in US inflation, rate hike worries and the stock market fall are weighing on the rupee sentiment. More rate hikes by the US Fed – the Federal Open Market Committee meets Wednesday, June 15 – will lead to higher outflows on the part of foreign portfolio investors (FPIs) who have already moved out Rs 22,978 crore from the stock markets in June so far. FPIs have since January this year taken out Rs 2.40 lakh crore from India, putting pressure on the rupee.

The rupee’s fall below the 78 level against the dollar on Monday came amid demand for dollars. The fall in the rupee is likely to make imports costlier and exports lucrative. “We might see more weakness ahead of the FOMC (Federal Open Market Committee) meeting on June 15, where the Fed is expected to hike rates by 50 bps and showcase a more aggressive tone. However, runaway depreciation might not happen amid RBI intervention,” said Jigar Trivedi, Research Analyst, Anand Rathi Shares & Stock Brokers.

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The global connect

The turbulence in the global markets is triggered by the twin concerns of sharp cuts to the central bank’s balance sheet and the accompanying policy rate hikes. Higher-than-expected US inflation data triggered concerns.

On Monday morning, the stock markets in the US fell again, with the Dow Jones Industrial Average tumbling 2.2 per cent, the S&P 500 plunging 3.1 per cent and the Nasdaq Composite diving 3.9 per cent. Analysts said the S&P 500 is lower by nearly 21 per cent from its record high, and back in bear market territory.

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The correction in the global markets is due to a double whammy of upcoming policy rate hikes and cuts to the central bank’s balance sheet. Higher-than-expected US inflation data added fuel to the concerns in the market which was factoring in a 50-bps hike in the Fed rate. The Indian market will stabilise only when the US market stabilises and the rate hikes by the US Fed stops. The market will bounce back when FPIs return and start pumping money again.

“Therefore, investors may wait and watch till clarity emerges on the market trend. One silver lining is the 7.1% increase in IIP which indicates that the Indian economy is doing well,” said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Analysts said investors should stay invested if they have a long-term investment plan and mutual fund investors should continue their SIP plan without breaking the investment. On the other hand, the big correction will give an opportunity to investors to pick up good quality stocks at attractive levels. “Investors should wait and watch the unfolding situation before making any major commitments. Buying should be confined to stocks/ segments which are valued fairly or have good earnings visibility,” said an analyst.

Asian stocks sank on Monday as red-hot inflation reignited worries about even more aggressive U.S. interest rate increases while new mass COVID-19 testing in China sparked concerns of more crippling lockdowns. European equities slid to the lowest level since early March as investors worried that surging inflation will fuel more aggressive monetary tightening, increasing risks of a recession.