Volatility in global markets, Fed’s hawkish tone to weigh on Dalal Street

Investors fear sharper hawkish tone from the US Fed in its rate-setting meeting on June 15 to contain inflation (at a 40-year high), driving up the dollar and bond yields. Analysts said a likely sell-off could test a long-standing support of 15,800-levels on the Nifty this week.

On Friday, Indian equities tumbled with the Nifty closing at 16,200, while the rupee closed at a record low ahead of the US inflation data release and concerns over elevated oil prices. US consumer prices increased 8.6% in May – the highest rate since 1981, intensifying investor fears that inflation is stickier than what was anticipated and the Fed may have to increase rates more aggressively that may slow down growth in the world’s largest economy or even push it into a recession. The Dow Jones Industrial Average fell 2.7%, S&P 500 dropped 2.9% and Nasdaq sank 3.5%.

“Persistent, energy price-fuelled inflation pressures are clouding the outlook for a soft landing,” said Christian Keller, global head – economics research at Barclays, in a note to clients. “As central banks’ normalisation efforts have to catch up with deteriorating expectations, financial conditions are tightening sharply, suggesting that real economic variables could deteriorate more rapidly in the coming months.”

Barclays expects the Fed to raise interest rates by 75 basis points on June 15.

Faster rate increases by developed market central banks would further depress appetite for riskier emerging markets, including India, amid flight to safe haven assets like the dollar.

“When the dollar index has crossed 104 and US bond yields are rising, markets are bound to be jittery,” said Siddarth Bhamre, head-research at Securities.”

The Nifty might breach 15,800 soon but I do not see a huge crash happening. The index will keep swinging in a band.” So far in 2022, the Nifty has fallen 6.6%.

A strengthening dollar and rising oil prices have already led to foreign investors pulling money out of Indian equities at a record pace as a weak rupee erodes the value of their holdings in the country.

Foreign portfolio investors (FPIs) were net sellers to the tune of Rs 3,973.95 crore on Friday, taking their sales tally for June so far to Rs 18,900 crore.

In May, they pulled Rs 37,664 crore out of stocks and their total outflow from domestic equities since January is at Rs 1.82 lakh crore.

“May’s soft patch for both short-term US interest rates and the dollar is quickly fading into the past and a hawkish FOMC meeting should keep the dollar supported near the highs,” said James Knightley, chief international economist at ING. “Higher US real rates will create headwinds for emerging market currencies — even those back by commodity exports.”