Markets week ahead: Can RBI’s policy give a breather from bears? 50 bps rate hike on cards

On Friday, Sensex fell 1,020.80 points, or 1.73%, to end at 58,098.92. The Nifty 50 slipped 302.45 points, or 1.72%, to close at 17,327.35. All sector indices saw a broad sell-off, with bank stocks suffering the most. Consumer durables, autos and capital goods also weighed on performance. Mid-cap and small-cap stocks also suffered.

Meanwhile, the rupee closed at 81.09 against the US dollar in the interbank FX market on the bench of strong dollar and risk aversion. The local unit had hit a new all-time low of 81.23 during Friday’s session.

FPI’s investment in the stock market is pending €8,638 crore through September 23 for the current month. FPIs have been net sellers over the past trading sessions. FIIs about removed €2,899.68 crore on September 23, which is higher than the outflow of €2,509.55 crore was recorded on September 22nd. Overall, FIIs were removed last week €4,361.77 crore from the shares.

Investors started the last week on a positive note, even posting notable gains on September 22nd, but as policy neared the Fed, sentiment deteriorated and extreme volatility was observed.

From September 20-23, Sensex fell more than 1,620 points and Nifty 50 lost almost 489 points. However, compared to the September 16 print, the Sensex and Nifty 50 sink capped at 742 and 250 points, respectively.

Mitul Shah – Head of Research at Reliance Securities said a 75 basis point rate hike by the Fed was already priced in but more than expected hawkish comments continued to impact the market.

While Vinod Nair, Head of Research at Geojit Financial Services, said: “The Fed’s 75 basis point rate hike was expected, but the continued aggressive stance suggesting a 125 basis point hike in the next two policy meetings through December 2022 has frightened the market. The INR fell to a new record low of 81 per USD as FIIs started selling.”

Markets week ahead

In Shah’s view, the US and Europe are all headed for a recession, while India is very likely to avoid it. The Bank of England hiked interest rates by another 50 basis points to 2.25%, equivalent to a half-point hike last month, the largest increase in 27 years. There is a domestic silver lining in the global downturn, with strong macros on key frequency indicators. The market will be watching next week’s upcoming RBI policy review. MPC will hold its three-day meeting between September 28-30, where a 50 basis point hike is not out of the question.

“Inflation has remained above the RBI’s upper tolerance band for the eighth straight month and is therefore expected to remain at ~7.5% in FY23, driven by the rise in food prices in line with the high-frequency food price trend. The Indian economy faces headwinds from geopolitical tensions, increasing financial market volatility, tightening financial conditions and recession concerns. The rise in the repo rate coupled with inflation is likely to impact the market in the short term. Key events ahead include: “Inflation forecast, comments on an external balance sheet, the tone of the policy statement and the path to interest rate normalization,” Shah added.

According to Nair, the prolonged restrictive monetary policy will continue to slow down the global growth engine. India is in a better position with a decoupled economy and a surge in credit growth and tax collection. However, an increase in geopolitical risk and an economic slowdown will hit India with a delay, weighing on performance in the near term.

For the week ahead, Nair said, “Investors will be eagerly watching the outcome of RBI monetary policy on September 30th. There is consensus that a 50 basis point rate hike will help strengthen the INR. Favorable oil prices and strong local demand could help the RBI maintain the balance between growth and inflation. We assume that the direction of the market will be determined by global developments and the actions of financial investors. On the valuation front, India is the most expensive stock market in the world today. So investors should wait and see until the dust settles.”

Shrikant Chouhan, head of equity research (retail) at Kotak Securities, cites inflation, central bank interest rate hikes, energy prices and recession as top global concerns. He said: “Crude oil prices have remained broadly stable but the Indian currency has depreciated over the past few days.

Additionally, according to Apurva Sheth, Head of Market Perspectives, Samco Securities, the much-anticipated US GDP growth numbers will be closely scrutinized by global markets. After a sharp decline of 1.6% in the first quarter, the GDP growth rate is expected to have declined by 0.6% in the second quarter, which was viewed as a positive. The direction of future Fed rate hikes may be influenced by this number, so international markets will be watching them closely. The outcome of the RBI MPC meeting will be the main topic of discussion at home.

Sheth added: “After falling for three straight months, retail inflation rose to 7% in August. The market expects the repo rate to rise by 50 basis points. will also keep the markets on their toes. Nifty50 closed this week at 17,327.35 down 1.16%.”

RBI has increased the policy repo rate by 140 basis points, or 1.4%, to the current 5.40%. So far this fiscal year, RBI has raised the repo rate on three consecutive policies. The six-member MPC remains focused on “adjustment withdrawal” to ensure future inflation stays within target while supporting growth.

In the August 2022 guidance, the RBI maintained its inflation forecast of 6.7% for FY23 – with a forecast of 7.1% in Q2, 6.4% in Q3 and 5.8% in Q4 th quarter with risks balanced. CPI inflation for Q1 FY24 is factored in at 5%.

Likewise, the RBI kept its real GDP growth forecast at 7.2% – with a forecast of 16.2% in Q1, 6.2% in Q2, 4.1% in Q3 and 4% in Q4. Real GDP growth is forecast at 6.7% in Q1FY24.

Disclaimer: The views and recommendations made above are those of individual analysts or brokerage firms and not Mint.

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