How Rising Inflation Has Spooked Equity Markets Globally

The Indian markets fell sharply lower in the week ended May 6 mirroring losses in US markets which faced their worst single-day selloff in almost two years. The Sensex fell as much as 1,115 points and Nifty 50 index dropped below its important psychological level of 16,400 at the day's lowest level. In the last three sessions, the Sensex and Nifty have fallen over 3.5 per cent as rising inflation across the globe have turned central banks across the world to turn hawkish and raise interest rates.

The Reserve Bank of India on Wednesday surprised the street and raised repo rate by 40 basis points and also hiked cash reserve ratio (CRR) by 50 basis points to suck out excess liquidity from the banking system.

Fighting Inflation

On Thursday, Wall Street witnessed its worst day in almost two years as worries grew in markets that the higher interest rates the Federal Reserve is using in its fight against inflation will slow the economy. The S&P 500 fell 153.30 points, or 3.6 per cent, to 4,146.87, Dow Jones Industrial Average fell 1,063.09 points, or 3.1 per cent, to 32,997.97 and the tech-heavy Nasdaq fell 647.16 points, or 5 per cent, to 12,317.69.

Russia’s war on Ukraine, high oil prices and global supply chain disruptions are adding to investor unease.

Also Thursday, the Bank of England raised its benchmark rate to the highest level in 13 years, its fourth hike since December to cool British inflation that is running at 30-year highs.

Back home, the Sensex and Nifty plunged 3.89 per cent and 4.04 per cent for the week just after RBI hiked rates citing inflation which has been above its tolerance level since past three months and is also expected at elevated levels in April, RBI noted.

Market participants are nervous about future course of corporate earnings as they fear rising inflation will impact profit margins of the companies at a time when markets are trading at high valuations and the expected earnings might not catch up with prices valuations, analysts said.

"Stock markets throughout the globe have become extremely fragile due to the entrenched inflation and the possibility of harsh measures by the central banks to tame the same, further other factors like geopolitical tensions, stagflation risk, and global economic growth slowdown have spooked Indian Investors and this led to a sharp fall in Sensex and Nifty," Sunil Nyati, managing director at Swastika Investmart told Outlook Business.

Nyati added that on the downside, 16,000-15,5000 are important levels for the Nifty 50 index going ahead while it faces immediate resistance around 17,000-17,250 levels.

"Technically, 16,000-15,500 is an important demand zone where we can expect some buying interest however bulls will need to do the heavy lifting to cross the 17,000-17,250 supply zone," Nyati added.