Indian benchmark equity indices lost nearly 2 percent towards the fag-end of the session on September 23 as the market participants felt that aggressive rate hike by US Federal Reserve and slowing Chinese economy could weigh on global economic growth. According to analysts at ICICI Securities, given the Fed’s growing aggressive stance to tame inflation, the US may enter a recession by second quarter of FY23.
Besides, Fed has clearly signalled that it is willing to tolerate a recession to get inflation back in control. On Thursday, the US Fed raised the rate by another 75 basis. In addition, its updated economic projections showed slower GDP growth and higher inflation.
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On Friday, both Sensex and Nifty declined for third the consecutive session. At 2:39pm, Sensex was at 58,110.22, down 1009.5 points or 1.71 percent, while Nifty lost 321.15 points or 1.82 percent at 17,308.65.
Here’s a look at the key factors fuelling the selloff:
US Fed ‘s aggressive stance: On Thursday, the US Fed raised the rate by another 75 basis points and surprised the markets by projecting further sizeable hikes in the coming months. Analysts now anticipate Fed to hike rates aggressively by another 75 bps in November, 50 bps in December and a final 25 bps hike in February 2023.
RBI Action: Traders are now awaiting the next RBI policy and its action to smoothen the liquidity and talk about the current run in the currency and falling reserves. Analysts expect RBI to raise rates by 50bps versus 35bps previously and a 35bps hike in the December meeting from 25bps previously, with upside risk to the forecast if commodity prices are higher in the fourth quarter of FY23. RBI may also hike rates by 50bps in 2023 from 75bp previously which would take the repo rate to 6.75% by April 2023, say analysts. The next RBI policy will be on September 28-30.
Shrinking Liquidity: The banking system liquidity slipped into a deficit for the first time in forty months. To smooth the liquidity, RBI conducted Rs 50000 crore Variable Rate Repo (VRR) auction on Thursday. Analysts said the deficit was due to outflow on account of advance taxes and the pickup in credit demand and slower pace of growth in deposits. Going forward analysts expect there will be demand for funds as the festive season begins. RBI is monitoring the situation and will take necessary steps, analysts added.
Lofty Valuations: Recent BNP Paribas note said that India’s premium valuation to its global peers and other Asian markets is unsustainable. The note said it is cautious on the Indian markets amid lack of positive catalyst for further earnings upgrades amid slowing global demand, lofty valuations and a slowdown in retail flows. On the lofty valuations of Indian markets, BNP Paribas said, “Historically, at this level, market returns in the next one year have remained muted and thus warrants caution.”
Cut in India’s economic growth estimates: A number of agencies have revised downwards 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.
The Asian Development Bank (ADB) has pared its 2022-23 growth projection for India’s economy to 7% from 7.5% estimated in April. Fitch Ratings 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%.