Mumbai: Indian markets on Thursday fell over 500 points as the continued surge in crude oil prices raised concerns of adverse impact on the economy. Hikes in minimum support prices for the winter crop also raised worries of inflationary pressure. The BSE’s 30-share Sensex shed 532.62 points, or 1.48%, to 35,443.01 and the National Stock Exchange’s 50-share Nifty dropped 154.95 points, or 1.43%, to 10,703.30.
“Tightening global liquidity, rising rates, and the weakening rupee are coalescing into an equity market correction, and is now challenging the perceived Teflon coating of local participation. We believe that our reflationary recovery thesis has peaked due to emerging global and domestic headwinds,” said Emkay Global said in a note to its investors.
The brokerage firm expects the Nifty to trade in the 10,400-11,000 range in the near term and believes that increased volatility can potentially trigger a pessimistic scenario of sub-10,000 levels. The firm also said even after the 19% decline in the mid-cap index, the trailing PE of 35x was still a 50% premium to the benchmark indices.
“The risk is that it can go back to an average discount of 12-15%, instead of a premium, as it existed prior to May 2014. We assess the sector-wise impact of the emerging macro headwinds and conclude that margin pressure will reemerge; prefer sectors benefiting from the weak rupee and lenders with positive asset liability matches and strong growth capital,” Emkay Global added.
Traders are now cautious and will look at the Reserve Bank of India’s bi-monthly policy outcome on Friday. Of the 15 economists surveyed by Mint, 14 expect the RBI to raise the repo rate, the rate at which it lends to commercial banks, to 6.75%. One economist expects a 50 basis points hike to 7%.
“The rupee has depreciated almost 7% since the last policy while crude oil prices are up by over 17%. This is a double whammy for a net oil importer like India. While the H1 FY19 CPI is likely to be within the RBI target range, the key is to see how much could H2 FY19 play spoilsport,” said Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra Asset Management Company.
“Rising US rates and the intent to effect many more rate hikes would also be a pointer for our policy makers. Hence it seems the stage is set for yet another rate hike. The markets seem to already have discounted a rate hike at current prices and the tone of the policy could be a key determinant for yield movements,” Iyer added.
On the global front, US 10-year treasury yields rose as high as 3.20% in early Asia trading after jumping 12 basis points on Wednesday after American businesses added 230,000 workers in September, the most in seven months, data released by the ADP Research Institute showed. The record employment reading is a positive signal before the official US jobs report Friday.
Comments by the US Federal Reserve chairman also dampened the sentiments. The Fed may eventually raise rates to levels where they begin to restrain economic growth, Chairman Jerome Powell said at an event in Washington overnight.