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Markets on a downhill drive: Key factors behind the slump

Analysts said recent comments by central bank officials, combined with the release of the minutes from the Fed’s July meeting, put the possibility of continued aggressive rate increases back in focus

August 22, 2022 / 11:36 AM IST

Indian markets opened over 1 percent lower for the second straight session, tracking losses in global equities. The benchmark Sensex and Nifty indices fell 640 points and 200 points, respectively. Analysts said comments in recent central bank officials, combined with the release of the minutes from the Fed’s July meeting, put the possibility of continued aggressive rate increases back in focus.

"We expect FIIs to remain net buyers as valuations are comparatively reasonable, while India’s growth is high compared to other emerging nations. Though near-term negatives in terms of concerns of depreciating rupee, widening trade deficit and volatility in global crude prices continue to exert pressure on the economy and the equity markets, we expect strong economic rebound, normalised commodity prices, inflation within a targeted range and better visibility in the second half of FY23," said Mitul Shah, head of research at Reliance Securities.

Let's take a look at the key factors behind the slump in the equity market:

Dollar, US 10 year yield: The dollar index is back above the 108 level, while the US 10-year yield hovers at 2.99 percent on concerns over global growth slowdown and US Federal Reserve's tightening weighed on sentiment. Fed Bank of Richmond President Thomas Barkin said on Friday the central bank was resolved to return inflation to its 2 percent target, even if that meant risking a US recession.  All eyes are on Fed chair Jerome Powell's speech on the economic outlook on Friday and may use his speech to clarify recent Fed commentary and to reset expectations for the future pace of rate hikes.

RBI Minutes: The minutes of the Reserve Bank of India's policy meeting indicated more interest rate hikes in the coming months as the retail inflation remained elevated, even as panel members noted that it may have peaked. Brokerage firm Barclays continue to expect the terminal rate in the current cycle to be 5.90 percent and to be achieved by the December policy review.

"While the minutes confirm that more hikes are coming, they also suggest the stance is not a significant policy signal, with greater data dependence going forward (due to an uncertain growth-inflation outlook) and that the terminal policy rate is not too far away. Overall, we retain our view of a terminal policy rate of 6 percent, with a 35bp hike in September and a final 25bp hike in December, before global growth concerns and the cumulative rate hikes delivered thus far lead the MPC to shift into an extended pause," Nomura Research said in its note.

DII Selling: Domestic Institutional Investors (DIIs) have been net sellers so far in August after being net buyers of the asset class for the previous 17 months. Since the start of August, DIIs have sold around Rs4,283 crore in Indian shares, after buying a net of more than Rs 3.67 trillion between March 2021 and July 2022, the National Stock Exchange (NSE) shows.

Selling pressure in Kotak Mahindra Bank, Zomato: Shares of Kotak Mahindra Bank and Zomato Ltd were under pressure. Kotak Mahindra Bank was under pressure after it missed out on inclusion in the Financial Times Stock Exchange (FTSE). Zomato dropped for the second session to near-one-week low after brokerage firm Nomura Research initiated coverage on the firm with reduced ratings with a price target of Rs 50 a share.

Technical View: Analysts suggests that traders should not be in a hurry to do bottom fishing here as it could see further price-wise correction in the near term. Any pullback moves towards 17,840-17,900 should be used as an opportunity to lighten up longs or even form short positions.

On the lower side, they expect the market to correct towards 17,550 first where support is placed on the hourly charts, while a break below the same could then lead to further correction towards the daily chart support at 17,330.

Moneycontrol News
first published: Aug 22, 2022 11:30 am