More Pain Ahead For Indian Assets As Stagflation Risks Turn Into Reality

Investors depressed mood and risks remain for Indian stocks and rupee

Indian equities and the rupee are facing more difficult times after a widespread recession since the war on the fringes of Europe, which was perceived as the threat and fallout of the Russia-Ukraine crisis, is fast becoming a reality.

Domestic equity benchmarks have taken a beating tracking broader global stock markets, which in late February saw fears about Russia attacking Ukraine, lockdowns in China and higher interest rates rattled financial markets. The blow has been sent.

Indian stock markets fell more than 2 per cent in April and started May on a weak note. With inflation data for April and international developments not very attractive, broader investor sentiment points to further downside.

Foreign investors have sold over Rs 6,400 crore from the Indian equity market in the first four trading sessions in May and remained net sellers in the seven months to April 2022, withdrawing over Rs 1.65 lakh crore from equities.

International crude oil prices rose sharply for the third month and traded above $100 on an average due to supply disruptions from the Russo-Ukraine war, weighing on the Indian currency.

A rising trade bill as the country imports 85 percent of its oil needs, a firmer dollar, rising crude prices, rising inflation and expected tighter monetary policy has stunned investors.

The rupee had closed at its all-time low on Friday. Dollar scalping neared its two-decade high, rallied for a fifth straight week after the Federal Reserve raised its benchmark funds rate by 50 basis points, and strong jobs data there raised bets on bigger hikes.

With futures market pricing in a 75 percent probability of a Fed lift-off by 75 basis points in June, and a rate hike of more than two percentage points this year, the dollar was expected to be a good bid and weigh on most currencies.

Several Fed policymakers are due to speak this week, which will give them plenty of opportunities to maintain a hawkish chorus as Russia-Ukraine shows no signs of giving up in its third month.

The fallout of the war on Indian assets was reflected in forex reserves falling below $600 billion for the first time since May 2021, wiping out the country’s FX war chest accumulation in just two months as the Reserve Bank of India has been forced to withdraw. To take steps to shore up Rs.

RBI raised its key interest rates in an emergency meeting last week, but inflation risks are rising despite fears of a slowdown in economic growth activity.

Vijay Singhania, Chairman, TradeSmart said, “With central banks across the world pressing the panic button and interest rates hiked, equity markets have also changed the sentiment. Foreign investors continue to sell.”

The expected interest rate differential dynamic and flight-to-safety trades point to a gloomy mood, despite RBI raising rates.

“Against a backdrop of declining Chinese and European activity, new plans for Russian energy sanctions and supply-side pressures came a series of hawkish communications,” Barclays analysts warned.

“This creates the bleak prospect of persistent inflation forcing central banks to raise rates despite increasingly slow growth.”

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