Indian equity markets registered losses in the last five trading days, logging their first weekly losses in a month as elevated crude oil prices and mounting concerns over global monetary policy tightening eroded risk appetite.
The week gone by was a volatile one for stock markets as the Reserve Bank of India announced a 50-basis-point rate hike and clearly hinted at even tighter financial conditions going ahead, given elevated domestic inflation.
Relentless sales of domestic stocks by foreign portfolio investors also dragged the headline indexes lower, with the BSE Sensex and the Nifty50 racking up losses of 2.6 per cent and 2.3 per cent, respectively.
“Basically, the foreigners have taken a view that Indian markets continue to be relatively overvalued in the face of rising inflation and rising global interest rates and they are sellers on all days,” Deepak Jasani, Head of Research – Retail, at Securities said.
“Plus, the rises in the markets are not sustained. They are being sold into either by the FPIs or the local traders. So, these two reasons are effectively leading to markets slipping.”
FPIs have net sold Rs 13,888 crore worth of stocks so far in June, NSDL data showed.
Broader markets did not fare quite as badly as the headline indexes, with the BSE Midcap and Smallcap indexes shedding 1.2 per cent and 2 per cent, respectively.
On the sectoral front, the Nifty Bank index dropped 2.2 pent, while the IT index slumped 2.6 per cent. Metals lost 2.4 per cent on the index while Nifty Realty shed 1.6 per cent. The Nifty Oil and Gas index, however, notched up gains of 0.4 per cent for the week, likely buoyed by a sharp rise in global crude oil prices.
Weakness in the rupee also hurt equities last week, amplifying concerns over FII outflows. A depreciating rupee eats into FIIs’ returns from Indian stocks. On Friday, the domestic currency touched a fresh all-time intraday low of 77.8750/$1.
“Rupee hit a fresh all-time low but in the last few sessions it has been very resilient and is consolidating in a narrow range despite volatility in domestic and global equities and strength in the dollar against its major crosses,” Gaurang Somaiya, Forex & Bullion Analyst,
Below are six key factors that may guide markets next week:
US inflation data
Data released after Indian trading hours on Friday showed that US consumer inflation rose to a fresh forty-year high of 8.6 per cent in May. With the rise in inflation in May outstripping market expectations, the pressure is building on the Federal Reserve to persist with aggressive rate hikes, risks to economic growth notwithstanding.
Reacting to the data, US stock markets slumped on Friday, with the Dow Jones plunging 880 points or 2.7 per cent. The S&P 500 fell 2.9 per cent, while the tech-heavy Nasdaq crumbled 3.5 per cent.
The carnage in US markets is likely to spill over into Asian markets and then Indian equities on Monday.
Domestic CPI inflation
The Central Statistics Office will release India’s Consumer Price Index-based inflation data for May at 5:30 pm IST on Monday.
A Reuters poll estimates headline retail inflation at 7.10 per cent in May. While the May print is seen lower than the 8-year high April reading of 7.79 per cent, the price gauge is still seen well above the RBI’s mandated range of 2.06 per cent.
Consequently, the central bank is seen continuing to raise interest rates and tighten liquidity, leading to a rise in cost of capital for firms.
The RBI hiked the repo rate by 50 basis points to 4.90 per cent last week, taking the total tally of rate increases in the last month to 90 basis points.
US Federal Reserve statement
The US Federal Reserve will release its next monetary policy statement on June 15, following a two-day meeting of the Federal Open Market Committee.
The FOMC, which has already raised its benchmark interest rate by a cumulative 75 basis points since March 2015, is expected to raise rates by 50 basis points each in June and July, given soaring inflation in the US.
The rapid pace at which interest rates and bond yields are climbing in the US increases the risk of more overseas outflows from Indian assets, as returns on financial assets in the world’s largest economy become more attractive.
As has been the case for the past few months, the trajectory of global crude oil prices will be a key determinant of domestic stock price movements in the week ahead.
Crude oil prices have hardened again of late following the European Union’s decision to ban a major chunk of oil imports from Russia as well as Saudi Arabia’s recent decision to raise prices for Asian buyers by a greater-than-expected quantum.
A barrel of Brent crude was trading around $122 per barrel on Friday, close to a three-month high.
On Friday, the price of India’s crude oil basket jumped to a 10-year high, driven by the disruptions in global supply chains following Russia’s invasion of Ukraine in late February.
High oil prices pose a significant upside risk to inflation and push up India’s trade deficit, given that the country imports more than 85 per cent of fuel needs.
Crude oil prices would be a key trigger for the movement of markets as India heavily depends upon its imports for the energy needs, making it among the top demanders for the petroleum products. Crude has been rising for six weeks now.
A likely continuation of FPI equity sales next week may weigh on headline indexes. With the US inflation data surprising on the upside, overseas investors may further pare down exposure to Indian stocks in anticipation of aggressive rate hikes by the Fed.
Higher interest rates in the world’s largest economy and a consequently stronger US dollar diminish the appeal of assets in riskier emerging markets such as India. The global strength of the dollar has led to the rupee weakening around 4.5 per cent against the greenback so far in 2022.
A weaker rupee erodes FPIs’ returns from Indian assets.
So far in 2022, FPIs have net sold a massive Rs 1.81 lakh crore worth of Indian stocks. The total tally of sales since October 2021 has crossed the Rs 2 lakh crore mark, standing at Rs 2.2 lakh crore.
The Nifty registered losses last week in line with global markets, and the benchmark appears to be moving towards a support zone between 15,900 and 16,100, Yesha Shah, Head of Equity Research, Samco Securities said.
“Despite the fact that this week’s trading patterns suggest additional downside, the overall bearish momentum has moderated as Nifty is currently trading above the falling resistance line. As long as Nifty does not fall below 15,900, there is a significant chance that it can test 16,800 levels. We recommend traders keep a neutral view for the coming week and avoid aggressive trades on either side.”