Indian markets traded lower for the third session in a row on September 16, taking their cue from global equities, on expectations that higher-than-expected August consumer inflation would prompt the US Federal Reserve to respond with a stronger interest rate hike the next time around.
Both the BSE Sensex and the National Stock Exchange’s Nifty have dropped over 2.3% in the last three trading sessions.
"Equity markets are likely to extend losses in early trade Friday, mirroring the weakness in global indices as investors are gearing up for a stronger interest rate hike by the US Fed following the recently announced higher-than-expected inflation numbers,” said Prashanth Tapse, Research Analyst and Senior Vice President (Research), Mehta Equities
The street now believes the Fed will raise its Funds Rate by 75 basis points, or BPs, at its September 21 meeting, followed by a hike by the same extent in November, and deliver a further 50 BP increase in December, Tapse said. One basis point is one-hundredth of a percentage point.
The US consumer price index accelerated 8.3% in August from a year ago.
Here are a few reasons why Indian markets are falling.
IT stocks falling: India's top five most valuable Information Technology firms lost a combined of Rs 1.60 trillion of market value in the last four sessions amid the selloff in global equities after the release of the US inflation number for August triggered risk-off bets.
Infosys lost around Rs 54,000 crore of market value in the last four sessions and TCS erased around Rs 76,000 crore of investor wealth.
HCL Technologies, Tech Mahindra and Wipro lost Rs 14,000 crore, Rs 10,000 crore and Rs 8,000 crore respectively.
IT stocks have been reeling since the start of the year. A recent downgrade by Goldman Sachs further dampened investor sentiment amid concern that aggressive rate hikes by the US would plunge the US, the biggest market for Indian IT services firms, deeper into the risk of recession.
So far this year, the Nifty IT index has lost 30%. Infosys erased 26%, TCS lost 19%, HCL Tech 31%, Tech Mahindra 41% and Wipro Ltd 43%.
Cut in India’s economic growth estimates: A number of agencies have revised down their forecasts for India’s economic growth after June quarter GDP data showed Asia’s third largest economy had expanded at a slower-than-expected 13.1% from a year ago.
Fitch Ratings on Thursday slashed its forecast for India's economic growth to 7% for FY23 from 7.8% announced earlier, citing elevated inflation and higher interest rates. It also cut the forecast for the next fiscal to 6.7% from 7.4%.
Moody's trimmed its real growth forecast to 7.7% for calendar year 2022 from an earlier projection of 8.8%.
Goldman Sachs trimmed its FY22 growth forecast for India to 7% from 7.6%. Morgan Stanley said there is a downside risk of 40 basis points to its growth estimate of 7.2% for FY23. Citigroup has slashed its FY23 growth projection to 6.7% from 8%.
Fed rate hike: After the higher-than-expected US inflation data for August, analysts are now bracing for a stronger interest rate hike by the Fed. Markets now expect the terminal Fed Funds rate at 4.25%. Analysts are also predicting a 20% chance of a 100 BP hike in the policy announcement next week.
Reserve Bank of India: India consumer inflation surprised on the upside in August at 7.0% year on year from 6.7% in July. Analysts now expect the Reserve Bank of India’s Monetary Policy Committee (MPC) to hike rates by 50 basis points at its next meeting on September 30, taking the repo rate to 5.90%.
"If inflation remains sticky, we believe the RBI can continue hiking in December, although we now expect no action in December, as things stand", an analysts added.
Commodity prices: In the last one week, London Metal Exchange (LME) nickel advanced 7.3%, LME aluminum rose 2%, LME zinc 0.5%, LME copper 1.3% and LME lead 1%.
The increase in commodity prices, if it sustains, is prompting experts to bet that inflation in India will remain at elevated levels.
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