On Tuesday, the BSE Sensex ended the day at 52,693, down 0.3 per cent. Since the beginning of this year, the Sensex has fallen by around 11 per cent. India markets are not an outlier. Around the world, equity markets have witnessed a sell-off. The S&P 500 is down around 22 per cent from its January levels. European stock indices, too, have witnessed weakness, as have Asian markets. Prior to this correction, the Sensex was trading at a price-to-earnings multiple of around 25. But even though markets are forward-looking, these valuations appeared stretched considering that the economy at the end of 2021-22 had only recovered to its 2019-20 levels. Alongside, the Indian currency has also weakened against the dollar. On Monday, the rupee breached the 78 mark for the first time, touching an all-time low of 78.29 against the dollar. However, the Indian currency has fared relatively better than its emerging market counterparts, which have fallen even more sharply. This weakness in markets can be traced to tightening monetary conditions, both globally and in India.
With inflation surging in most economies, investors now expect more aggressive interest rate hikes by central banks to tackle the growing price pressures. In the US, the Federal Reserve was expected to raise interest rates by 50 basis points this week. However, with recent data showing that inflation had surged to 8.6 per cent in May, some analysts are now penciling in a rate hike as steep as 75 basis points. In an uncertain macroeconomic environment, investors will rush towards safer assets. The DXY — a dollar index which measures the strength of the currency against a basket of six other currencies, namely the euro, pound, Japanese yen, Swedish krona, and Swiss franc — has strengthened to multi-year highs.
In India, along with foreign portfolio investors (FPIs) being net sellers, a rising trade deficit — it rose to $23.3 billion in May — adds to the pressure on the currency. On its part, the Reserve Bank of India is reported to have intervened in the currency markets to stem the rupee’s slide. However, it should do so only to smoothen volatility. It must let the currency find its own level. A weaker currency will act as an automatic stabiliser triggering necessary adjustments. As the macroeconomic environment becomes more challenging, policy-makers in India will have to carefully navigate this tumultuous period, as they withdraw the pandemic-induced accommodative measures, while nurturing a recovery.
