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Monday, June 27, 2022

Explained: Why Indian markets have crashed, and what is likely to happen next

The benchmark Sensex at BSE fell sharply in the initial trading hours Monday due to various factors including the Russia-Ukraine war, China's economic growth, rise in Covid-19 cases and impending US Federal Reserve rate hike.

Written by Sandeep Singh , Edited by Explained Desk | Mumbai |
April 18, 2022 10:44:57 am
Given the global scenario around geopolitical concerns and inflation, equity markets are likely to remain volatile in the near term. (Express Photo: Amit Chakravarty, File)

The benchmark Sensex at BSE fell sharply by 1,280 points or 2.2 per cent in the initial trading hours Monday, under pressure from lingering global inflation concerns, expectations of a faster pace of rate hikes by the US Federal Reserve, and concerns over weakness in the Chinese economy, alongside the rising Covid-19 cases.

While the Sensex fell by up to 2 per cent, other key Asian markets, too, fell sharply on Monday. The Nikkei in Japan fell up to 1.9 per cent, while Shanghai Composite in China fell by up to 1.3 per cent.

Why did Indian markets fall?

Indian markets that opened after a gap of four days fell sharply in line with growing concerns over various developments, including the continuing Russia-Ukraine war. There have also been concerns over the European Union embargo on Russian gas, and some sanctions on Russian crude in the next set of EU sanctions.

As inflation continues to remain a big concern, there are expectations in the market that the US Fed may increase the pace of rate hike; instead of a 25 basis point hike, it could even go for a 50 basis point hike, experts believe.

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While the rate hikes were expected, a sharp increase could result in faster outflow of funds by foreign portfolio investors, and could keep the emerging economy markets and the domestic equity markets under pressure.

The Chinese impact

Another factor that has impacted the market sentiment is the concern over rising Covid-19 cases in China, and the slower than expected pace of growth of the Chinese economy.

While Shanghai has been in lockdown since March, the city reported three deaths on Monday.

Meanwhile, news agency AFP reported that China’s economy grew 4.8 per cent in the first quarter as a Covid resurgence pulled down economic activity. The National Bureau of Statistics too warned of “significant difficulties and challenges” ahead, reported AFP.

Experts feel the restrictions in China are likely to hurt global supply chains and that could further lead to rise in inflation, which has already been impacted by the Russia-Ukraine war.

So, what next for Indian markets?

Given the global scenario around geopolitical concerns and inflation, equity markets are likely to remain volatile in the near term. The FPI flows may remain unstable and may even witness an outflow in line with an expected increase in the pace of rate hike by the US Fed. Even domestic inflation, which hit 6.95 per cent in March, continues to be a cause of concern for Indian markets. The continued pressure on account of inflation may force the RBI to also go for faster rate hikes.

In its recently released monetary policy statement, the RBI signalled a shift in its focus from reviving growth to mitigating risks posed by inflation. Even as it kept the policy rates unchanged for now, it indicated a possible hike in repo rates going forward. “In the sequence of priorities, we have now put inflation before growth. Time is appropriate to prioritise inflation ahead of growth,” RBI Governor Shaktikanta Das had said after unveiling the bi-monthly policy review.

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