Opinion Freefall in markets: US Fed will show the way

Indian stock markets have been experiencing sustained weakness. From the highs observed last year — on September 27, 2024, the BSE Sensex had touched 85,978 — it is down around 13 per cent. Since the beginning of this year, the Sensex is down about 5 per cent. While on Tuesday it was up marginally, most sectoral indices are in the red. The fall among the smaller firms is steeper — the BSE Midcap index is down almost 15 per cent since the beginning of the year, while the BSE Smallcap index has fallen around 19 per cent. After this correction, the Sensex is trading at a price to earnings ratio of 21.48.

There are both global and domestic reasons for the fall. A state of uncertainty has gripped global markets following the election of Donald Trump and his subsequent announcements on tariffs, taxes and immigration. Trump’s tariff proposals, some of which have been kept on hold while others are already in effect, have soured investor sentiment. The threat of reciprocal tariffs weighs heavily on countries. But higher tariffs will be inflationary for the US. Inflation data released a few days ago has further complicated matters for the US Federal Reserve — in January, inflation rose to 3 per cent. On the domestic front, the corporate results season has been subdued. For instance, in the third quarter, HUL registered a 1.8 per cent revenue growth, while UltraTech Cement saw a growth of just 2.9 per cent. As per ICRA, 602 listed companies, excluding those in the financial sector, saw their revenues grow at just 6.8 per cent. Growth for the fourth quarter has been pegged at 7-8 per cent. Commentary from brokerage houses suggests that corporate profitability is “under strain”. Foreign investors have continued to be net sellers with reports suggesting increasing allocations towards China. After withdrawing $13.7 billion in October and November last year, net investments by foreign portfolio investors were -$12.8 billion in the first two months of the year (data up to February 25). The pressure on the rupee continues. On Tuesday, it fell by 51 paise, settling at 87.23 (provisional) as per reports.

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At the end of this week, the National Statistics Office will release its estimates for GDP growth in the third quarter, and the second advance growth estimates for the full year. These will provide clarity on the underlying economic momentum in the country. Thereafter, the March meeting of the US Fed will provide clues on the trajectory of interest rates. These will shape investor sentiments in the near term.