The inflationary concerns outlined in the minutes of the recent meeting of the US Federal Reserve, possibility of more rate hikes and escalation in tensions between Russia and Ukraine have clouded overseas investment into India.
Until a few days ago, it was believed that the Fed would deliver two 25bps rate hikes this year, followed by a long pause. The Fed funds rate was expected to peak at closer to 5% and the central bank was expected to do a U-turn at the end of CY23 or the first quarter of CY24. But market participants expect three more rate hikes this year and the peak rate is now expected to be well above 5%.
“Such rate actions will not be not conducive to risk-based investments in emerging markets such as India,” said UR Bhat, director, Alphaniti Fintech. “The bigger issue is that Russia has said it is suspending its participation in the New START treaty and the US has pledged more military aid to Ukraine. All of this does not augur well for risk-based flows.”
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Nearly all Fed policymakers supported the decision to slow the pace of interest rate hikes at the Fed’s last policy meeting, but indicated that bringing inflation under control would be the key determinant in how much further rates need to rise.
“Financial markets have continued to price in the risk of a more hawkish Fed, a reaction which makes sense given recent data and the departure from the US central bank of vice chair Lael Brainard. The adjustments to the way inflation is measured have also significantly reduced the impact of the previously ultra-benign base effect on headline CPI in the first half of this year,” said Christopher Wood, global head of equity strategy at Jefferies.
Foreign portfolio investors have pumped in about $403 million this month into Indian shares, after yanking out $3.6 billion in January. FPIs pulled out $16.5 billion last year.
The benchmark Nifty 50 closed at 17,465 on Friday to its lowest close in the last four months and down 2.6% over the past week.
The risks of geopolitical shocks triggering a renewed surge in the oil price are rising, according to Wood, and there’s a growing likelihood that markets will start to react to news flow on Ukraine again, having essentially ignored the conflict for the past several months. “Ukraine still has the potential to trigger massive market movements, most particularly in terms of a renewed surge in energy prices, which would both undermine still lingering hopes of a near-term end to Fed tightening and trigger renewed concerns about accelerating monetary tightening,” Wood said.
Currently, Indian markets are range bound, with the Nifty trading at about 18x FY24E EPS. There is room for modest upside but only if corporate earnings do not see material downgrades ahead, according to experts. Corporate earnings for the third quarter were below expectations, led by a weak demand environment and macro headwinds.
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“The short-term trend of Nifty continues to be negative. Having failed to show any crucial bottom reversal pattern near the important support of 17,500 levels so far, there is a possibility of further weakness in the coming sessions. The next lower support is at 17,300 and any upside bounce from here could find resistance at 17,600 levels,” said Nagaraj Shetti, technical research analyst, HDFC Securities.