Sensex, Nifty slump for the third straight day on inflation fears

India’s benchmark indices fell about a per cent for the third straight day on Friday as investor sentiment turned negative with rising bond yields and global oil prices.

The Sensex again slipped below the 60,000 mark and ended the session at 59,464, a decline of 634 points, or 1.06 per cent. The Nifty, on the other hand, dropped 181 points, or 1.01 per cent, to close at 17,757.

In the last three sessions, the Sensex has lost 1,844 points, or 3 per cent. After the three-day sell-off, India’s year-to-date gain has narrowed to 2.1 per cent from 5.2 per cent at the start of the week.

Most global markets have seen turbulence as the 10-year US bond yield hit a high of 1.9 per cent after starting the year at 1.5 per cent. The spike comes as investors expect the US Federal Reserve to raise interest rates four times this year to tame persistently high inflation. However, the US markets were up in early trade on Thursday, with the Dow Jones, S&P 500 and Nasdaq trading higher by 1 to 1.8 per cent.   

In a double-whammy for the Indian markets, global oil prices hit $88 per barrel on Thursday — the most since 2014. Experts believe that the spiralling oil prices could worsen the macroeconomic scorecard for India, as it heavily depends on exports. This could also prompt the Reserve Bank of India (RBI) to raise interest rates earlier than anticipated.

“The source of the problem right now is global inflation, and it is largely driven by commodity inflation. As long as commodity price rise persists, inflation will become entrenched, necessitating harsher measures from central banks,” said Raamdeo Agrawal, chairman and co-founder of Motilal Oswal Financial Services. “Positive (quarterly) results will give some cushion to the markets, but they will be very volatile because of the Budget, state elections, interest rate hikes, inflation, and elevated valuations. Globally, equities are becoming less popular,” Agrawal said.

Further, the rising yields have led foreign portfolio investors (FPIs) to become net sellers in markets like India. Domestic Institutional Investors (DIIs) have also joined their foreign counterparts in selling shares during the last few sessions. On Thursday, FPIs sold equities worth Rs 4,680 crore and DIIs net bought shares worth Rs 770 crore. In the preceding two sessions, both FPIs and DIIs were net sellers.

“We expect volatility in equity markets to remain high in 2022, unlike last year, because of an expected increase in interest rates and liquidity tightening by global central bankers. We believe that long-term investors should utilise this volatility as an opportunity to increase their equity allocation. This increased equity allocation should spread over the next few months, and each market fall should be used for greater allocation,” said Naveen Kulkarni, chief investment officer, Axis Securities.

The elevated valuations and rising Covid cases have further tilted the balance against Indian equities. India reported more than 317,000 new Covid-19 cases in the last 24 hours ended at 9 am on Thursday.

Rising cases have brought concerns about the disruption in economic activity.

“The markets are currently facing global headwinds, and there's no relief from the domestic front as well. However, we feel it's a healthy correction so far and expect the Nifty to hold the 17,600 zones. For traders, the major challenge is to tackle the volatility amid the earnings season. We feel it's prudent to limit positions and prefer a hedged approach until the markets resume the uptrend. On the other hand, investors shouldn't worry much about the recent fall and maintain their focus on accumulating quality stocks on dips,” said Ajit Mishra, VP research, Religare Broking.

The market breadth was slightly weak, with 1,727 stocks declining and 1,678 advancing. More than a dozen sectoral indices ended the session with losses on the BSE. IT stocks fell the most, and their sectoral indices fell by 1.7 per cent.