Market Cues Point To More Pain Ahead For India Assets: Key Highlights

Indian equities and the rupee face more pain ahead after a broad and deep slump since the war on the edge of Europe as stagflation, which was considered a fallout of the Russia-Ukraine crisis, is fast becoming the baseline scenario.

Key Highlights And Factors To Watch For:

Domestic equity benchmarks have taken a beating, tracking broader global stock markets, which have been whiplashed since Russia attacked Ukraine late in February, lockdowns in China, and fears about higher interest rates have sent a nervous jolt through financial markets.

Global trends, wholesale price-based inflation data for April and the ongoing quarterly earnings of corporates would be the major driving factors for the stock markets. Indian bourses lost over 2 per cent in April and in May so far have closed deep in the red on most days. Sensex was down 2,041.96 points or 3.72 per cent for the week ending on May 13, on stagflation worries and the exodus of capital on flight-to-safety trades.

Foreign investors’ selling of Indian stocks continued, as they pulled out a little over ₹ 25,200 crore from the Indian equity market in the first fortnight of this month, on a hike in interest rate globally and concerns over rising COVID cases.

“On the domestic front, the listing of LIC IPO will be a key sentimental trigger for the Indian equity market. FIIs are selling relentlessly, whereas DIIs are trying to compensate for their selling; therefore, their behaviours will also play an important role in the market direction. Movement of the dollar index, crude oil prices, and direction of rupee will be other important factors,” Santosh Meena, Head of Research at Swastika Investment, told PTI.

“Inflation concern and monetary tightening across the globe are key concerns for the equity markets. Equity markets are under the strong grip of bears; however, they look extremely oversold and are due for a pullback rally. The sell-off in the US market, especially in tech stocks, was very severe, and there is some stability in the last two trading sessions that may provide some respite to the bulls,” added Santosh Meena.

The latest Indian data for April showed spiralling inflation, and with International developments not too appealing, broad investor sentiment points to more downside. Despite the RBI raising rates, the expected interest rate differential dynamic and flight-to-safety trades point to a gloomy mood.

“A series of rate hikes and hawkish communication came against a backdrop of plummeting Chinese and European activity, new plans for Russian energy bans and continued supply-side pressures,” warned analysts at Barclays, Reuters reported. “This creates the gloomy prospect of persistent inflation forcing central banks to hike rates despite sharply slowing growth.”

That has weighed on the Indian currency when international crude prices have risen sharply and traded above $100 on average for the third month on supply disruptions from the Russia-Ukraine war.

The rupee hit fresh record lows repeatedly last week. Indeed, the rupee on May 9, Monday, closed at a record low at that time of 77.44 against the dollar. It breached 77.50 per dollar at different times to repeatedly break its lifetime intra-day lows. On Thursday, the currency ended at a new all-time low of 77.50 after hitting a fresh intra-day weak level of 77.63 against the US dollar.

The fallout from the Ukraine war on Indian assets was also reflected in India’s forex reserves falling for the ninth straight week to over a year low of $595.954 billion, wiping out the country’s FX war chest accumulations of a year in just about two months as the RBI has been forced to step in to shore up the rupee. That is for a week before the rupee fell to its all-time lows, suggesting further erosion.