The Sensex and Nifty indices in India fell over 5% in June alone, as global markets remained mainly dismal and foreign investors sold off assets.
The Sensex and Nifty were both at one-year lows after a 4.9 percent drop in June, the worst in 27 months since March 2020. At the same time, the rupee fell roughly 1.8 percent to a historic low of 79 to the dollar, but 10-year bond yields remained unchanged.
The market is under pressure as investors anticipate an economic slowdown caused by Russia’s confrontation with Ukraine. The geopolitical crisis fueled a record surge in inflation in the majority of the world’s major countries, drove up crude oil prices to $119 per barrel, stoked commodity prices, and opened the path for a global food catastrophe.
Because of the high level of inflation, most central banks have rushed to tighten monetary policy, making it even more difficult for firms to recover. The Reserve Bank of India raised the key policy rate twice in the last two months to 4.9 percent, signalling that more pain is on the way for businesses.
With oil prices lowering and China eliminating Covid-induced restrictions, Indian markets have seen some rebound in recent days.
“The recent rate hike by the RBI in response to the US Fed’s move has caused extraordinary market turbulence. The United States is suffering 40-year-high inflation, and market sentiment is centred on the expectation of additional rate hikes in the near future. Consumer confidence is at an all-time low, raising the prospect of a recession in the United States by the end of 2022 “Reliance Securities’ Head of Research, Mitul Shah, stated.
Selling pressure from foreign institutional investors (FII) continues to be a major cause of the market’s decline. Between January and June 2022, FIIs sold around $28.37 billion in shares, while domestic institutional investors (DII) invested Rs 2.27 trillion.
“We anticipate that the market will stay under pressure in the short future. The FIIs will return to the market in the second part of FY23, while DII investments will continue in 2022, limiting the severe drop to a degree “Shah stated.
Brokerage firm BoB Cap warned that the central bank’s rate hikes will hasten the pace of capital flows. “Growth and inflation dynamics are back in motion,” according to a BoB Cap study. “The priority is inflation, and we expect it to decline in the next months.”
As world leaders gathered for the G7 summit, vows were made to coordinate efforts to alleviate the approaching food crisis and lower energy costs. The judgments of three of the world’s top central bankers – European Central Bank President Christine Lagarde, Bank of England Governor Andrew Bailey, and Federal Reserve Chairman Jerome Powell – are now the focus of all eyes.
“Developing countries are economically dependent on the US Federal Reserve. This may come across as harsh, but it is not. History may not repeat itself exactly, but if the dollar continues to strengthen with the vigour it did 40 years ago, the journey will be rough for emerging countries “Vikram Kasat, Head of Advisory at Prabhudas Lilladher, was notified.