Stocks plunge close to 2%, rupee hits fresh low
MUMBAI: Indian stocks witnessed a broad sell-off on Friday as investors lost appetite for risky emerging markets assets on fears that major central banks may raise interest rates more aggressively to contain inflation, choking economic growth.
Benchmark indices Sensex and the Nifty fell 1.84% and 1.68%, respectively, on Friday.
High crude prices, the unrelenting selling by foreign portfolio investors and rising US treasury yields also pressured the rupee, which slipped to fresh lows. “The equity market across market caps and sectors traded lower on account of several global factors. The shutdown of Shanghai once again, the prospects of lower global economic growth, as also the expectations on some of critical numbers like the US and India inflation are factors that have infused gloom in the market,” said Joseph Thomas, head of research at Emkay Wealth Management.
Investors are anxiously awaiting the outcome of the US Federal Reserve’s meeting next week. Though a half-percentage point hike is widely anticipated, the Fed’s decision may be swayed by the latest inflation number. On Friday, the US government said consumer inflation quickened to 8.6% in May, the highest level in over four decades, on surging energy and food prices. Investor sentiments were also soured by the European Central Bank’s decision to end its long-running stimulus scheme and deliver its first interest rate hike since 2011 next month, followed by a larger increase in September.
From India’s perspective, the inching up of crude prices is adding to the discomfort. Brent rose to $127.95 a barrel on Friday, substantially higher than close to $100 levels about a month back. Rising real rates in the US due to Fed’s faster pace of rate hikes, slowing global growth and rising oil prices are driving money towards the US and causing the dollar to strengthen against most currencies, including the rupee, said Anindya Banerjee, vice-president, currency derivatives and interest rate derivatives at Kotak Securities Ltd.
Higher US benchmark bond yields due to aggressive policy rate hikes will also strengthen the dollar. Sriram Iyer, a senior analyst at Reliance Securities, said oil could continue to remain elevated and weigh on the rupee.
“The expectation is that the Fed could continue to raise rates and maintain its hawkish stance, and we expect the USD-INR (spot) to trade with a positive bias and gradually head towards 78.50 levels,” said Gaurang Somaiya, a forex analyst at Motilal Oswal Financial Services.
The strengthening of the dollar index is impacting the rupee, increasing the cost of imports, including oil. India imports more than 80% of its oil requirements. Higher crude and commodity prices also impact earnings of companies. “Current elevated crude prices aggravated the currency impact on the economy due to higher import bills, and a continued weakening of the rupee would continue to impact Indian equity markets,” said Mitul Shah, head of research at Reliance Securities.