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Explained: Day after monetary policy, why are markets falling?

The plunge was triggered by higher US inflation data and fears over higher-than expected rate hike by the US Fed.

The benchmark Sensex, which fell 1,000 points in the opening session, was trading 903 points, or 1.5 per cent, down at 58,023.46. (File Photo)

A day after the Reserve Bank of India unveiled a “dovish” monetary policy, keeping the rates unchanged for a tenth time in a row, stock markets on Friday plunged by over 1,000 points in intra-day trade.

The plunge was triggered by higher US inflation data and fears over higher-than expected rate hike by the US Fed.

The benchmark Sensex, which fell by over 1,000 points in the opening session, was trading 903 points, or 1.5 per cent, down at 58,023.46 and the Nifty Index 268 points lower at 17,338.10 at 10.35 am IST on selling pressure in IT, capital goods, financial and realty stocks. IT index is down by 2.32 per cent.

Why are markets falling?

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Indian markets are dictated by the trend in the US. Consumer price inflation in the US rose 0.6 per cent from the prior month and 7.5 per cent a year ago, the biggest annual gain since February 1982, the US Labour Department said. After the inflation report, market pricing indicated a near-certainty of a 50-basis point hike at the March 15-16 US Fed meeting.

The Dow Jones Index tumbled 1.5 per cent, the S&P 500 1.8 per cent and the Nasdaq composite 2.1 per cent on Thursday, triggering a sell-off in other global markets, including India.

On the other hand, the 10-year US Treasury yield shot up 10 basis points to 2.03 per cent, crossing the 2 per cent level for the first time in 30 months. The two-year Treasury yield skyrocketed 26 basis points to 1.61 per cent, which is higher than the 10-year yield was at the end of 2021. “A rate hike by even 50 bps by the US Fed in March is looking increasingly probable now. This is not good news for global equity markets,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

What will be the impact on Indian markets?

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When interest rates rise in the US, the gap between rates in countries like India reduces, giving less incentive for foreign investors to pump in money into other markets as they prefer to invest in their home ones. This means that foreign capital outflows can happen.

After withdrawing Rs 41,346 crore in January, foreign investors have pulled out Rs 9,821 crore in February so far from stock markets, anticipating a hike in US Fed rates. Another impact will be on the rupee as capital outflows will put pressure on the currency value against the dollar. The rise in rates also means higher cost of funds and fund mobilisation in overseas markets will be costly.

What should be the strategy of investors?

Long-term investors should avoid knee-jerk reactions and stay invested. While equity overweight investors would be wise to not aggressively invest in equities and redeploy some of the funds in hybrid schemes, experts say that investors who are underweight equities, can utilise dips in market to increase equity portfolio.

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First published on: 11-02-2022 at 11:46:39 am
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