Equities under pressure amid inflation concerns

Investors fear that inflationary pressures have raised concerns that the US Federal Reserve may tighten policy rates faster than expected.

On Thursday, the BSE Sensex had closed 433.13 points or 0.72% lower at 59,919.69. Nifty closed at 17,873.60, down 0.8% or 143.6 points.

“Global inflationary pressures forced the domestic market to trade with deep cuts after disturbing US inflation data. Rising inflation pressure, as well as an early rate cut,” said Vinod Nair, Head of Research, Geojit Financial Services. The growth prospects may keep the domestic market on edge as such indicators prompt foreign investors to pump liquidity from emerging markets like India.”

US consumer prices rose in October as Americans paid more for food and fuel, making the biggest annual gain in more than three decades.

Inflation could remain uncomfortably high through 2022 amid stretched global supply chains.

Communications with the US Fed could also be complicated by rising inflationary pressures. The Fed said last week that high inflation is “expected to be temporary”.

Inflation is heating up again as the summer wave of Covid-19 infections, driven by the delta variant, continues to cause economic drag, fade and supply bottlenecks.

Trillions of dollars in pandemic relief from governments around the world boosted demand for the goods, crippling supply chains.

“The US inflation shocker came on top of a strong CPI report from China, showing a pass-through of raw material prices in consumer goods. Deeply negative real interest rates raise fears that the Fed may struggle to ensure price stability. This could prevent additional leverage or prevent asset bubbles from expanding/forming in core and non-core markets,” said Madhavi Arora, principal economist, Emkay Global Financial Services.

Foreign Institutional Investors (FIIs) continue to be net sellers of Indian stocks.

In October and November, FIIs were net sellers of Indian equities worth $2.27 billion, after investing $1.84 billion in the previous two months.

According to Siddharth Khemka, Head of Retail Research, Motilal Oswal Financial Services Ltd, Indian markets are likely to strengthen on weak global cues, continued selling by foreign portfolio investors and the last leg of the earnings season.

“Investors will now await clues from the US Fed as to how soon it will start raising interest rates. Otherwise, the domestic macro trend remains encouraging while active COVID cases continue to decline,” he said.

However, analysts at UBS in India expect a growth risk rather than worryingly high real inflation to fuel policy normalization in South Asia.

“Higher-than-expected inflation or a faster growth recovery could lead to Fed tightening and a shift in domestic monetary policy, which could upset credit cycle tailwinds. The unusually high level of potential elections,” UBS said in a November 11 note. The number carries the risk of occurrence.

Reuters contributed to the story.