Pressure mounts on equities amid inflation worries

Investors fear that inflationary pressures have raised concerns that the US Federal Reserve may tighten policy rates much faster than anticipated.

On Thursday, the BSE Sensex fell 433.13 points, or 0.72%, to 59,919.69. The Nifty shed 0.8% or 143.6 points to 17,873.60.

“Global inflationary pressure following upsetting US inflation data forced the domestic market to trade with deep cuts. Rising inflationary pressure, along with prospects of an early rate hike, can keep the domestic market on the edge as such indicators tempt foreign investors to pump out liquidity from emerging markets like India,” said Vinod Nair, head of research, Geojit Financial Services.

US consumer prices accelerated in October as Americans paid more for food and fuel, leading to the biggest annual gain in more than three decades.

Inflation could stay uncomfortably high well into 2022 amid stretched global supply chains.

Broadening inflationary pressures could also complicate the US Fed’s communication. The Fed last week restated that high inflation is “expected to be transitory”.

Inflation is heating up again as the economic drag from the summer wave of covid-19 infections, driven by the Delta variant, fades and supply bottlenecks persist.

Trillions of dollars in pandemic relief from governments across the globe fuelled demand for goods, leaving supply chains overstretched.

“US inflation shocker came on top of strong CPI report from China, showing pass-through of raw material prices into consumer goods. The deeply negative real interest rates instil fears that the Fed could struggle to ensure price stability, contain excess leverage or prevent asset bubbles from expanding/forming in core and non-core markets,” said Madhavi Arora, lead economist, Emkay Global Financial Services.

Foreign institutional investors (FIIs) have continued to remain net sellers of Indian shares.

In October and November, FIIs were net sellers of Indian equities worth $2.27 billion after pumping $1.84 billion in the previous two months.

Indian markets are likely to continue to consolidate, given weak global cues, persistent selling by foreign portfolio investors and the last leg of the earnings season, according to Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services Ltd.

“Investors would now await clues from US Fed as to how soon it would start hiking interest rates. Otherwise, the domestic macro trends continue to be encouraging while active covid cases continue its declining path,” he said.

However, analysts at UBS in India expect risk to growth, rather than worryingly high actual inflation, to drive policy normalization in South Asia.

“Higher-than-expected inflation or a quicker growth recovery could lead to faster Fed tightening and a shift in domestic monetary policy, which could upset credit cycle tailwinds. An unusually high number of potential elections poses event risk,” UBS said in an 11 November note.

Reuters contributed to the story.