Inflation, rising rates, falling markets: now what?

The heavy outflow of money by foreign portfolio investors (FPIs) from Indian markets amid global growth concerns, rising inflation and central bank monetary tightening has accelerated the decline in equity markets. .

Anticipating a rise in inflation in April, which reached 7.8%, the Sensex on the Bombay Stock Exchange fell 1,158 points or 2.1% on Thursday to close at 52,930, its lowest level since March 7 when it closed at 52,842. The Sensex has lost 4,045 points, or 7%, in the last seven trading sessions as FPIs have withdrawn a net amount of Rs 23,670 crore since the Reserve Bank of India announced a surprise 40 point hike basis in repo rates on May 4. Since October, FPIs have netted out Rs 1,86,089 crore.

In the same period that the Sensex has lost 7%, the US Dow Jones Industrials has also lost 7% since the Federal Reserve raised interest rates by 50 basis points on May 4. Hong Kong’s Hang Seng lost 8.2%, Japan’s Nikkei lost 4% and Germany’s Dax lost 3.4%.

concerns

Market sentiment has been negative for now amid fears that the RBI could opt for a series of rate hikes to keep inflation in check. The Fed has already raised rates twice in the last two months, 25 basis points in March and 50 basis points last week.

An increase in interest rates will hurt not only consumption in the economy but also the margins of listed entities. If higher raw material costs will hurt margins, higher interest rates will increase the cost of funds for companies, hurting their profitability in coming quarters.

As April CPI inflation hit an eight-year high of 7.8%, credit rating agency CRISIL said in its report: “We expect the RBI to raise repo rates by another 75-100 bps in the rest of this fiscal year. This move cannot reduce food or fuel inflation, but it can help control its spread by curbing second-round effects.”

A report by Kotak Institutional Equities said that in 2022, from now on, RBI could increase the repo rate by 90-110 basis points. Therefore, growth expectations are likely to moderate in line with rate hikes, which will closely follow the path of inflation.

Where are the markets headed?

As central banks expect inflation to remain elevated for some time, they are likely to continue measures to keep it under control. With the end of Russia’s war against Ukraine still in sight, the geopolitical situation will continue to weigh on global economies and stock markets. Further rate hikes will push FPIs out of emerging economies, influencing these markets and their currencies. Therefore, with markets likely to remain under pressure, investors will have to wait and see how the inflation situation plays out in the coming months.

However, even when markets fall, investors should take a cue from what domestic institutional investors (DIIs) have been doing. In May, while IPFs took out a net amount of around Rs 25,000 crore from Indian stocks, DIIs invested a net amount of Rs 23,565 crore. And since October 2021, against an FPI net outflow of Rs 1.86 lakh crore, IIDs have invested 2.24 lakh crore.

Therefore, retail investors may choose to invest in value for the long term, as net asset values ​​have fallen and several blue chip stocks are trading at a significant discount. Investors should be cautious and look for high-quality companies, investing their money only if they can stay invested for 3-5 years.

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