Markets continue to decline, Nifty, Sensex slip nearly 1 per cent: What’s worrying investors at the moment?

It’s been a worrying Wednesday for the market so far. Continuing with the volatile trend earlier this week, the indices have seen sharp correction in afternoon trade. The Nifty has slipped over a percent and is now trading around the 23,600 mark while the Sensex has breached the key 78000 mark. The continuous outflow of funds has been a source of worry but that apart there are some broad macro concerns for the indices too.

Macro worries for investors: Inflation at 14-month high, rate cut unlikely in Dec

The inflation reading for October came in at 14-month high. At 6.21%, the inflation print was significantly higher than expectations that were hovering under the key 6% mark. This is an outcome of a combination of factors. Starting with unfavourable base effects, vegetable prices at new highs, especially inion prices shooting to 5-month highs and also international palm oil prices inching upwards. According to JM Financial they see “upside risk of 40bps to RBI’s inflation expectation of 4.8% for Q3FY25. Markets are building in shallow rate cut cycle by the Fed. We believe RBI would avoid any premature policy moves and continue to focus on domestic macros over external events. We expect status quo in Dec’24.”

Even Dharmakirti Joshi, Chief Economist, CRISIL corroborated the view, “though non-food inflation remains benign around 3%, the recurring flare-up in food inflation has kept headline inflation elevated and creates an upside risk to the inflation trajectory – restricting the easing in monetary policy. We expect the Monetary Policy Committee (MPC) to hold rates steady in December, given the sharp rise in food inflation in September and October. That said, in our base case, we expect food inflation to ease this fiscal as kharif sowing has been healthy. Vegetable prices can correct sharply when fresh stocks enter the market. Accordingly, we expect the MPC to cut rates towards the end of this fiscal.”

Global cues

The Asian markets have closed on a weaker note in line with US markets that ended trade on Tuesday significantly weaker. The Nikkei shut ship down 1.69% while Hang Seng closed down 0.17%. The Dow closed nearly 300 points lower on Tuesday- November 12. The Chinese markets however bucked the trend driven by strong stimulus push by the Chinese Central Bank.

FII selling continues

Of course the continued fund outflow has been a worrying factor for the markets. In November alone FIIs have sold over Rs 25000 crore so far and this follows the nearly Rs 1 lakh crore seen in the previous month, i.e. October. Most market observers are however of the opinion that the current outflow is more of an asset reallocation as India is significantly high valued in the EM basket compared to the likes of China.

US Fed policies- All eyes on CPI inflation

The US Fed’s policies at the moment is also a source of worry for the markets. Its stance on stance on interest rates has also triggered capital reallocation in US and other developed markets. This has led to increased outflow from the overall emerging market segment. This coupled with the dollar strength make the dollar denominated assets significantly more attractive.

Market Outlook- Profit booking seen

Most market observers however feel that there is some profitbooking ahead of the upcoming market holidays and the state elections. Kishor Ostwal, CMD at CNI Research said, “Markets should take sharp U turn from next week post exit poll whatever is the result of exit poll. Next week is short just 3 sessions and ahead of election only 2 so short covering is evident. With RSI at 25 there is no scope of big fall and 10% rise in Nifty is possible.”