Bears tightened grip on the Indian equity markets on Monday as fears of aggressive interest rate hikes spooked investors. May consumer inflation hit a fresh 40-year high of 8.6 per cent in the US, while India CPI inflation in May is expected to stay above 7 per cent.Given this, the BSE S&P Sensex tumbled over 1,400 points to 52,860 levels, while the Nifty50 broke below 15,700 levels on Monday, June 13. Broader markets, too, entered the bearish zone as Nifty Midcap 100 and Nifty Smallcap 100 sunk up to 3 per cent in trade.
All sectors bled in red with bank, metals, and realty bearing the brunt of the selloff. Analysts believe that the persistent equity selloff by foreign investors, negative sentiments across global markets due to fear of aggressive rate hikes by the US Federal Reserve (US Fed), coupled with a weaker rupee was dampening investors’ risk appetite.
That said, analysts expect the near-term volatility in markets to dissipate as markets discount the US Fed’s rate action”Markets have already discounted the rate hike by the US Fed and RBI’s rate action in future. The consistent selling by foreign investors and sour global market mood is dampening investor sentiment. For long-term investors, it is an opportunity to buy high quality names like banking and financials,” said Gaurang Shah, head investment strategist, Geojit Financial Services.
Here are top five reasons behind the sharp slump in Indian equity markets on Monday:
US inflation at new 40-year high: The US inflation hit a fresh 40-year high in May, accelerating to 8.6 per cent from a year ago and beating street estimates. The red-hot inflation extended Wall Street’s selloff on Friday, June 10, as US equity futures slumped in trade on Monday morning, June 13. With this hot consumer-price data, it has fueled bets that the US Fed will have to step up its battle against inflation.
Fear of aggressive rate hikes: After the latest US inflation data point – the US Fed will likely continue its aggressive interest rate increases to help cool high prices after their 2-day Federal Open Market Committee (FOMC) meet due on Wednesday, June 15. Analysts expect the inflationary pressure to materialize in a longer time due to elevated crude oil prices borne out of the Ukraine war and supply bottlenecks due to covid-19 led lockdowns in Asia.
According to a poll by Reuters, the US Fed is likely to hike its key interest rate by 50 basis points in June and July, with rising chances of a similar move in September. Faced with a red-hot inflation, economists expect the Fed to quickly take its policy rate to the neutral level that neither stimulates nor restricts and beyond. The rate hike fears sent US 10-year treasury yields above 3 per cent for the first time in three years.
Volatile crude oil prices: Oil extended losses for third straight day as investors anticipate further monetary tightening by the US Fed to combat rise in US inflation levels and the potential for further lockdowns due to jump in Covid-19 cases in China. Both Brent Crude and WTI Crude slipped 1.4 per cent to trade at $120 per barrel and $118 per barrel, respectively. The prices of crude oil tumbled after China announced mass testing in Beijing due to ‘ferocious’ spread of Covid-19.
Indian inflation data: India will release retail inflation figures for the month of May on Monday, June 13. According to a Reuter’s poll, economists expect the consumer price index (CPI) to slip 7.10 per cent in May from 7.7 per cent in April. They expect the May CPI to be in the range of 6.7 per cent to 8.3 per cent. After the Reserve Bank of India (RBI) lifted its interest rates by 50 basis points last week, they expect inflation to remain above its 6 per cent upper tolerance band until December this year.
Rupee’s freefall and FIIs on exit mode: The Indian rupee fell to a record low of 78.15 against the US dollar on Monday on stronger demand for dollar, fear of rising interest rates by the US Fed, and volatile crude oil prices. Besides that, India’s decline in foreign exchange reserve by Rs 30.6 crore in June also weighed on the domestic currency.
Meanwhile, persistent selling by foreign portfolio investors (FPIs) dampened investor sentiment. FPIs have been net sellers for eight consecutive month, offloading Rs 13,888 crore worth of equities so far in June. With this, the FPIs have sold Rs 1,81,043 worth of equities so far this year.