These 5 factors weigh down market: Sensex falls over 550 points

The market, after consolidating through the last few sessions, was caught in a bear trap across sectors since this morning. The broader markets, too, participated in slump with the Nifty Midcap and Smallcap 100 indices losing arond 0.6 percent each.

The BSE Sensex plunged 568 points or 1 percent to 55,107, which has so far lost nearly 1,400 points since last Friday's high. The Nifty50 dropped 153 points or 0.92 percent to 16,416 at close.

Let's look at the five factors that pulled the market down.

1. RBI Policy

The Street may be cautious ahead of outcome of the three-day Monetary Policy Committee meeting that will be released by the RBI tomorrow. Experts largely expect around 40-50 bps hike in the repo rate to counter rising inflation worries, which the market seems to have already priced in, hence the key thing to watch out for would be its commentary considering the elevated oil prices, widening trade deficit and unstoppable geopolitical situation. The central bank has to keep an eye on inflation, currency and bond yields.

Overall, the Reserve Bank of India is likely to bring the repo rate to the pre-Covid levels, hence experts predict a 150-bps hike in repo rate.

"Inflation management is tricky as the real repo rate is deeply negative at -3.4 percent (4.4 percent-headline CPI at 7.8 percent) and -2.6 percent assuming core inflation of 7 percent. Thus, to arrive at a neutral real rate of 1 percent, the RBI will have to substantially increase the repo rate and tighten liquidity," Dhananjay Sinha, MD and Head of Strategist at JM Financial Institutional Securities, said.

He added that assuming that core inflation softens to 6 percent in the next 12 months, the short-term rates will have to be at 7 percent from the current level of around 4 percent (overnight call money rate). This would ideally call for 200-250bps addition to the repo rate.

Over the next 12 months, the RBI is expected to hike rates by 150bps at least and a 40-50bp hike on June 8, the expert said.

Crude oil is the key risk for importing countries like India as it buys around 85 percent of its petroleum requirements. International benchmark Brent crude futures traded at $120 a barrel at the time of writing this article, up six-tenth of a percent on likely rising demand from China as the world's second largest economy relaxed Covid curbs and Saudi Arabia hiked its official selling price.

Having oil price above $100 a barrel for a longer tenure is already a risk and, on top of that, it is at $120, which means it is expected to be incremental risk for an already widening trade deficit.

Inflation remains to be a key factor considering higher price we are paying for imported oil. Not only the CPI inflation but also the US inflation will be watched closely by the Street.

Experts anticipate the CPI inflation to remain above 7 percent in May, though it may cool down from 7.8 percent seen in April due to fiscal measures taken by the government last month which can cap the upside pressure in domestic prices to some extent.

"While seasonal factors are likely to reverse some of the price pressures in the former over time, imported inflation remains a serious concern, and will likely continue to exert a heavy burden on households and corporates in terms of spending and profits, respectively," Rahul Bajoria, MD and Chief India Economist at Barclays, said.

US inflation data will be released on Friday, which will be a key data for the Federal Reserve ahead of its meeting next week. Experts largely expect the US inflation to be around 8.0-8.3 percent for May.

Global counterparts are largely under pressure today with European markets like France's CAC and Germany's DAX declining more than half a percent each while Britain's FTSE falling 0.2 percent at the time of writing this article, on inflation worries.

In Asia, Australia's ASX 200 was down 1.5 percent after the Reserve Bank of Australia hiked the cash rate by 50bps to 0.85 percent, which was higher than analysts' expectations. South Korea's Kospi dropped 1.6 percent, Hong Kong's Hang Seng declined half a percent, whereas Japan's Nikkei and China's Shanghai Composite were moderately higher.

Every key sector, barring oil and gas, is under pressure with bank, financial services, IT, FMCG, metal and pharma declining 0.9-1.6 percent.

The downside in the market is restricted by oil and gas stocks given the elevated oil and gas prices in the international markets. ONGC was the biggest gainer, up 5 percent, followed by GAIL (up 2 percent) and Reliance Industries (up 0.2 percent).

India VIX, the fear index, increased by 1.1 percent to 20.43 levels. Having volatility around 20 levels is largely hurting bulls, which has to fall below 18 mark for stability in the market.

Technically the Nifty50 has formed bearish candle as the closing price is lower than opening levels. If the index falls and sustains below 16,400 levels, then touching of 16,000 in coming sessions can't be ruled out, experts said.