The Sensex and the Nifty closed 1.56% and 1.63% lower, tracking global peers, on the back of concerns over economic growth due to rising inflation, said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services Ltd. Further, higher bond yields, as well as continued selling by foreign institutional investors, added to the pressure, added Khemka.
“The single important factor roiling global equity markets is the re-emergence of inflation as a major threat and the market’s scepticism over the central banks’ ability to contain inflation without triggering a sharp economic slowdown," said V.K. Vijayakumar, chief investment strategist at Geojit Financial Services.
Asian indices such as Taiwan, Shanghai Composite and Hang Seng all ended 1.72-3.81% lower. Only Jakarta Composite and Nikkei could manage some gains—of 0.45%-0.69%.
After rate hikes by the Reserve Bank of India and the US Fed, hawkish commentary and negative economic growth outlook by the Bank of England spooked global markets. Global markets tumbled 2-3% after interest rate hikes to curb rising inflation, thus hitting economic growth, said Khemka. Bank of England raised interest rates to their highest since 2009 at 1% on Thursday.
Investors worried the interest rate hikes may negatively impact emerging markets.
“A hawkish Fed and rising global inflation narrative will compel central banks to persist with the normalization of monetary policies. As a result, a higher cost of capital will somewhat dilute earnings momentum in EM economies like India, where the impact of higher input costs and rising interest rates will likely be more palpable in Q2 FY23," said Niyati Khandelwal, head-sales and trading-institutional equities, Yes Securities.
Selling by FIIs is expected to accelerate as bond yields in the US begin to offer better returns at higher credit ratings, which will eventually weaken the Indian financial market, said Vinit Bolinjkar, head of research at Ventura Securities Ltd.
FIIs continue to remain net sellers, having sold ₹1.34 trillion worth of equities in 2022, till 5 May. A weaker rupee does not bode well for their returns either.
Bond yields, too, further inched up from 7.40% on Thursday. Edelweiss Asset Management had said that bond market participants expect RBI to raise the repo rate to 5.15%, a pre-pandemic level, quickly, and aim to complete the policy rate normalization process. It said the repo rate will reach there by December.
Rising crude prices are adding to the inflation concerns as Brent moved up to $114 a barrel levels on Friday. Notably, Brent had softened to near $101 a barrel levels in the last week of April. Oil prices are rising higher on persistent concerns over the tightness of global supply, said experts.
Markets selling intensified further on Friday as rising crude oil prices reignited fears that inflation would pose a major challenge going ahead, said Amol Athawale, Deputy vice-president-Technical Research, Kotak Securities Ltd
“Additionally, a stringent lockdown in China has severely impacted global supply chains and also remains a key concern of the markets. Asian stocks fell on worries about the hit to growth from China’s zero-covid policy," said Deepak Jasani, head of retail research at HDFC Securities. The US dollar hit 20-year highs and world stocks fell towards their lowest in over a year on Friday as markets expected more US interest rate rises, he added.
