Indian markets may remain volatile this week, with the Federal Reserve considering raising key interest rates during its meeting on 15 March, as inflation in the US hit a four-decade high. Investors are also concerned over the Russia-Ukraine conflict.
Indian stock markets remained in the green during the last three trading sessions. On Friday, the euphoria over the results in favor of the Bharatiya Janata Party (BJP) in four out of five state elections swept the markets.
The positive opening in European indices also helped the Nifty and the Sensex gain 0.21% and 0.15%, respectively. For the week, the Nifty and the Sensex ended with gains of more than 2%.
“After the strong recovery during the week, domestic market trend turned cautious on Friday, as focus shifted to next week’s upcoming issues like inflation, and the Bank of England and the US Fed policy,” Vinod Nair, head of research at Geojit Financial Services Ltd.
Meanwhile, global sentiment turned negative with ceasefire talks between Russia and Ukraine failing to make any headway, while US inflation accelerated to a 40-year high in February to 7.9%. The US Fed could move more aggressively to curb inflation, said Siddartha Khemka, head of retail research, Motilal Oswal Financial Services Ltd. Investors weighed in the European Central Bank’s decision to unwind stimulus measures sooner than expected, he added.
Global inflation levels, including in India, are set to rise further in March, though on a temporary basis, as a fallout of Russia’s war in Ukraine, said experts. Besides, global crude oil prices remained volatile with Brent trading at $117.51 per barrel on Friday, up from $114.22 a barrel in the previous session.
Amish Mehta, managing director and chief executive, CRISIL Ltd, said: “A spike in commodity prices, especially of crude oil, will have a bearing on India’s macros, including the current account deficit and inflation. These would create headwinds to growth.”
Typically, a $10 rise in crude oil price increases the current account deficit to gross domestic product (GDP) ratio for India by about 40 basis points.
Rupee depreciation is adding to the woes of investors. Acuité Ratings and Research Ltd expects the Indian currency to depreciate in the near term amid a significant jump in crude prices and a decline in the equity markets.
Increased risk of high energy prices and their impact on macro parameters is likely to be key in shaping the market direction for the near term, said Srikant Chouhan, head, equity research (retail), Kotak Securities Ltd. Amid sustained high inflation, the Indian markets will closely monitor the announcements at the US Federal Reserve meeting scheduled next week, he added.
Meanwhile, foreign institutional investors remained net sellers, withdrawing net investments of over 1.1 trillion in 2022 till 10 March. Domestic institutional investors were net buyers, purchasing stocks worth 9,300 crore.
With the state elections behind, the equity markets will move on to more important aspects such as the Russia-Ukraine conflict, US Fed rate hikes, elevated crude oil prices, and the Reserve Bank of India’s response to rising inflationary pressures, Khemka of Motilal Oswal said.
He expects markets to stay volatile till the headwinds subside. Valuations at a P/E ~19x FY23E EPS for the Nifty look relatively more reasonable, he added.
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