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Global equity markets are in the firm grip of a bear hug. The US Dow Jones plunged over 1,000 points on Wednesday -- the biggest decline since 2020 -- and this morning Asian indices opened lower too. Tracking these sentiments, Indian benchmark equities nosedived. The BSE Sensex was down by around 1,416 points even as the Nifty tumbled below 16,000 at the close.
The epicentre of these fears is inflation. Uncertainties over the magnitude of impact from the prolonged Russia-Ukraine war, logistics issues and supply shortages aggravated by recurring waves of the COVID-19 virus, are leading to spiralling energy and commodity prices.
Wasn’t this already known? Yes, but signals from central banks show that inflation is now worrisome. The US Federal Reserve is determined to keep raising interest rates until there is evidence that inflation is steadily falling. The minutes of the recent unscheduled Monetary Policy Committee (MPC) meeting of the Reserve Bank of India, summarised in this article, echo the need to tame surging inflation. But there is a wide range of opinions about how much tightening is needed.
In a recent interview with Moneycontrol Pro, the CEA V Anantha Nageswaran said: “While demand has been resilient and was beginning to become broad-based, inflation may begin to eat into the purchasing power of consumers, impacting demand differently across sectors. This may lead to a K-shaped recovery, with different sectors recovering at different rates.”
What’s spooking investors is that the impact of inflationary pressures on corporate profitability is already visible in the March quarter results. While revenue may have risen due to increase in prices, gross and operating margins across sectors, be it auto and auto components, fast-moving consumer goods, real estate, construction, cement, etc. have been crimped.
Besides, cautious management commentary and uncertainty ahead raise concerns of further earnings downgrades. One can see weak investor confidence not just in frontline stocks, but in the 10-15 per cent drop in most sectoral indices since October.
Globally too, the story is not different. US retailer Target’s profits halved and Hong Kong’s Tencent Holdings’ quarterly revenue failed to grow, reportedly, for the first times since its IPO in 2004. E-commerce businesses, too, fear the return of consumers to offline stores following easing of COVID restrictions.
Much depends on how soon central banks can tame inflation and more importantly, how much will rate hikes drag down growth. Without doubt, it is closely linked to how long the Russia-Ukraine war would continue, the sanctions and the geopolitical equations between economies thereafter.
For India too, these global adversities will continue to fuel inflation and dampen economic recovery. Sachin Pal from Moneycontrol’s Research team argues in this piece that both the Fed and the RBI are making a policy error, as tightening is only going to make things worse. The effect of the ongoing liquidity squeeze will only be felt with a lag of 6-9 months.
Of course, as they say, markets have a mind of their own. If raising interest rates can succeed in lowering demand enough to dampen soaring prices of commodities, it could help cool inflation. This may help reduce fears of further downgrades in corporate earnings and calm the ongoing tremors in equity markets.
Investing insights from our research team
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Nowhere to hide (republished from the FT)