Apart from concerns over a slowdown of the US economy and the eurozone debt crisis, high domestic inflation and fears of an interest rate hike will keep the stock market volatile this week, say experts.
The 30-share Bombay Stock Exchange Sensex index lost 2.69% to close at 16,839.63 last week amid persistent selling pressure on worries over the global economic crisis after ratings firm S&P downgraded the US creditworthiness.
An unprecedented downgrade of the US credit rating by Standard & Poor's on August 5 led to a sharp fall in the market, with investors resorting to panic selling.
On Tuesday, when the markets will open for trade this week, the overall inflation numbers for July will be released.
Headline inflation stood at 9.44% in June, while weekly food inflation shot up to 9.9% at the end of July, sparking fears of a further round of interest rate hikes to tame prices.
The market was surprised by the higher-than-expected rate hike of 50 basis points by the Reserve Bank last month. Now, the sharp spurt in food inflation has raised concerns that the central bank will stick to its monetary tightening policy.
"People are expecting interest rates to go up. Worries over the US and eurozone crisis are still high and fresh in the minds of investors. There is a possibility of a pullback from current levels, but we should be bracing for some more volatility in the short term," said Geojit BNP Paribas Research Head Alex Mathews.
Analysts said that given the tricky situation in overseas markets and local macro-economic headwinds, it would be wise to remain cautious and stay stock-specific.
The global environment will play a pivotal role in directing the investor sentiment, they added.
Domestically, it will be inflation and macro-economic concerns that will guide the investor mood.
"Fund flows in the Indian markets have not been that bad, considering the intensity of the sell-off. The government, too, is trying its best to address the governance deficit. But inflation continues to be a big headache, with food inflation flaring in end-July," IIFL Head of Research Amar Ambani said.
On the macroeconomic front, exports continue to be robust, but might moderate in the coming months owing to the slowdown in the US and Europe, he added.
