Indian markets declined over 1.7 percent tracking losses in global equity counterparts and getting nervous over central bank minutes released yesterday as benchmark Sensex fell over 900 points and Nifty 300 points.
Asia-Pacific equity index shed about two percent led by losses in Japan and Chinese technology firms. US and European futures retreated in the wake of a four percent plunge in the S&P 500 index, the biggest daily drop in almost two years.
Moreover, analysts warned of tough times for the Indian economy going ahead.
"The rupee hitting an all-time low, US Fed’s tightening policy and continuous FPI (foreign portfolio investor) sale are likely to have economic ramifications in the near term. Rising inflationary pressure has compelled the Fed and other central banks across the world to begin raising interest rates in the coming months which has led investors to believe that an economic recession is looming. India is apprehensive as a tumbling rupee and imminent rate hike signify a hit to operating margins and profitability," said Mitul Shah, head of research at Reliance Securities.
As stocks take a tumble, here are factors driving the meltdown:
Global selloff: Dow Jones fell over 1,000 points overnight amid concerns about economic growth after retailer Target Corp shares fell over 26 percent on rising fuel and freight cost. A day before Walmart Inc posted its results and pruned its earning forecast. Analysts said deteriorating macro sentiments such as soaring inflation, recession fears, and the prospect of the US Fed getting even more hawkish will continue to keep benchmarks on the edge.
RBI minutes: Investors were concerned after the central bank’s emergency meeting minutes released yesterday showed one member of the rate-setting panel pressing for an immediate repo rate hike of more than 100 basis points while others favoured less aggressive rate action in the future. All of them had voted for an off-cycle hike earlier in May, which some felt was necessary to avoid stronger action going forward.
Nomura Research said in a note to investors: "We retain our terminal repo rate forecast of 6.25 percent by April 2023. In view of the rate setting panel’s focus on frontloaded hikes to get to 5.15 percent soon, we are tweaking our policy path slightly to a 50 basis point hike in June (versus 35 bp earlier), 35 bp in August (versus 50 bp earlier), followed by 25 bp rate hike each in October, December, February and April. Risks are skewed to the upside, both in June (a 75 bp hike is live) and to our terminal rate forecast (of 6.25 percent)."
Relentless selling by FIIs: Rupee hit a record low after weakening for five consecutive sessions on continued selling by foreign institutional investors. One of the reasons for selling pressure in the domestic equity markets is continued offloading by FIIs who continue to be net sellers for the eighth month. They have sold shares worth Rs 37,937 crore in May.
Inflation bites earnings: Investors were also worried after quarterly earnings showed surging inflation eroding profit growth of top companies. Of the 28 Nifty 50 companies that have announced results so far, 11 missed estimates and 17 matched.
Downgrades by brokerages: Recently Bank of America revised Nifty target to 16,000 from 17,000 citing faster rate-hike risks. The brokerage also said in a negative scenario Nifty can show a 15 percent downside from current levels. Recently, UBS downgraded GDP growth forecast for the current financial year from 7.7 to 7.0 percent, adding that the central bank risks failing its inflation mandate.
(Bloomberg inputs)
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