Inflation fears, crude price spook markets, Sensex, Nifty fall nearly 1%

The benchmark indices sharply declined on Wednesday, even as Moody's raised India's credit rating from negative to stable. Rising bond yields and crude oil prices dented investor sentiment and stoked concerns around global growth outlook.

The yields on 10-year and 30-year US Treasuries have reached their highest level since June, while crude oil is trading around multi-year highs. Both are seen as headwinds for emerging markets.

After rising nearly 2 per cent in the previous two sessions, the Sensex fell nearly 1 per cent, or 555 points, to close at 59,189. The Nifty slipped 176 points to end at 17,646. The India VIX index rose 5.7 per cent to 17.33, a sign that traders expect more volatility during the week.

Foreign portfolio investors (FPIs) sold shares worth Rs 803 crore on Wednesday, taking their two-day selling tally past the Rs 2,000-crore mark.

The rise in crude prices adds to investor worries about inflation and the prospect of reduced Federal Reserve stimulus. The Federal Reserve's bond purchase programme and zero interest rates had helped global markets to rally from pandemic lows.

The rise in energy prices has led to fears of inflation eating into corporate profits, the prospect of reduced spending, and more pressure on central banks to curtail easy money policy. At 6.40 pm IST, Brent crude was trading at $81.80 a barrel. Earlier in the day, it rose as high as $83.47, the highest since October 2018.

The 10-year US bond yield was trading at 1.55 per cent, the highest level in close to four months.

The IMF has cut its economic growth expectations; New Zealand has become the latest central bank to raise interest rates. Asian equities have seen heavy foreign outflows on concerns about China's property sector and on expectations that major central banks will raise interest rates soon amid worries about rising inflationary pressures.

"Weak global markets that resulted in profit-booking in metals and IT stocks led domestic indices to trade in the red, trimming their early gains. The spike in crude oil prices is spooking the Indian market, while inflation is affecting US bond yields. The RBI has commenced its three-day MPC meeting in which the central bank is expected to keep rates unchanged. However, it is likely to announce measures to pump out liquidity from the economy gradually," said Vinod Nair, head of research, Geojit Financial Services.

Analysts said that Moody's outlook upgrade means that there is the possibility of sustained growth and eventual fiscal consolidation.

The market breadth was negative, with 1,892 stocks declining and 1,404 advancing. All the Sensex stocks barring three fell. IndusInd Bank slipped the most — 3.4 per cent. All the sectoral indices ended the session with losses. Metal and health care stocks fell the most, and their gauges declined 3 and 1.7 per cent, respectively.

“The weak advance-decline ratio also suggests widespread profit-taking. Even if global markets show some recovery, the Nifty can again run into profit-taking after a small recovery. Investors may take part of their profits and raise cash, while traders can keep strict stop losses and reduce their positions until the sentiment improves," said Deepak Jasani, head of retail research, HDFC Securities.