Nifty and Bank Nifty Tumbles Due to Weak Global Cues.

Summary

Nifty and Bank Nifty tumbles due to weak global cues lead by higher inflation data, higher crude oil prices and weakening currency.

The market closed deep in the red on Monday, starting the week on an ominous note. The benchmark index, Nifty 50 plunged by 2.6%, reacting to weak sentiments across the globe. This was triggered by a record high inflation rate in the US, which was announced late night on Friday. 

Investor hopes of the US inflation having peaked out were dashed after the inflation rate accelerated to 8.6%, the highest level since December 1981. The record high inflation number has put the markets on alert as the US Federal Reserve might hike interest rates further in its two-day policy review meeting that starts on 14 June. Besides this, investors were also cautious ahead of the domestic inflation data release for May. In April, retail inflation in India stood at 7.7%, an eight-year high. Crude oil is a major economic input, so a rise in oil prices contributes to inflation which measures the overall rate of price increases across the economy. Consumer price index (CPI) set a 40-year high in March 2022 amid COVID-19 supply disruptions. Crude oil prices were the highest in a decade as the U.S. and its allies imposed sanctions on Russia due to its invasion of Ukraine. Energy accounted for about 7.3% of the CPI as of December 2021, including the index weighting of about 4% for energy commodities. Higher oil prices raise inflation indirectly because crude oil is a key ingredient in petrochemicals. So, more expensive oil will tend to increase the prices of many products. Similarly, consumer prices factor in transportation costs, including fuel prices, and the cost of oil accounts for roughly half of the retail price of gasoline. The indirect contributions of crude oil prices to inflation are reflected in the core CPI Index which does not include energy or food prices because they tend to be more volatile. Federal Reserve Chair Jerome Powell said in his semiannual testimony before the U.S. Senate Banking Committee in March 2022 that, as a rule of thumb, every $10 per barrel increase in the price of crude oil raises inflation by 0.2% and sets back economic growth 0.1%.

Geopolitical tensions, rising inflation and faster policy tightening by central banks across the globe have collectively triggered relentless selling by foreign institutional investors (FIIs). In India, FIIs have been net sellers so far in 2022 and have offloaded investments worth 75,000 crore since the start of the new financial year, resulting in significant fall in stock market. Capital outflows by FPIs are likely to continue in such a scenario where the rise in US interest rates will attract foreign investors back to their home country. The rise in US inflation, rate hike worries and the stock market fall are weighing on the rupee sentiment. More rate hikes by the US Fed– the Federal Open Market Committee meets Wednesday, June 15 – will lead to higher outflows on the part of foreign portfolio investors (FPIs) who have already moved out Rs 22,978 crore from the stock markets in June so far. FPIs have since January this year taken out Rs 2.40 lakh crore from India, putting pressure on the rupee.

The correction in the global markets is due to upcoming policy rate hikes and cuts to the central bank’s balance sheet. Higher-than-expected US inflation data added fuel to the concerns in the market which was factoring in a 50-bps hike in the Fed rate.  The Indian market will stabilise only when the US market stabilises and the rate hikes by the US Fed stops. The market will bounce back when FPIs return and start pumping money again.

The rupee also plunged against the US dollar below the 78-mark to hit a low of 78.29, recovered a bit during the day, but still closed at a record low of 78.13. The yield on India’s 10-year benchmark bond rose 8 basis points to 7.60 per cent, signalling the upward pressure on interest rates in the banking system. Further, there is an accentuated demand for the US dollar, which is generally considered a safe haven during the time of uncertainty.

A Four-decade high inflation in the US triggered concerns about aggressive rate hikes by the federal reserve and singed stock and currency markets in India. Domestic equities joined the global sell-off with the benchmark Sensex plummeting 2.68 per cent or 1,457 points to close at 52,846.70. The Nifty index fell 2.64 per cent or 427 points to close at 15,774.40 as fears of higher capital outflow marred investor sentiment. Foreign portfolio investors pulled out Rs 4,164 crore from Indian stocks on Monday and huge selloff is seen in LIC since lock-in period of anchor investor ended. 

Current Market outlook for Nifty:

Currently market can not be considered in a bear phase since it has corrected only 16% from its all time high. In bull run 20-25% correction is considered as a healthy correction. If the correction gets more deeper than 25% then we can see a trend reversal in the market and our market may go under bearish phase.

Currently, Nifty is at its strong support of 15650. Its a make or break situation for nifty. Still nifty has a downside potential of 15200-15500 if the current support of 15650 is broken.

Current Market outlook for Bank Nifty:

Bank nifty has already corrected for more than 23% in month of march and now it trading at a discount of around 20% from its all time high.

It seems that bank nifty has limited downside potential from the price at which its trading, Its immediate support is at 33000.