Over-heated bond yields in the US and ever-increasing crude oil prices broke investors’ confidence on Indian markets. In the sharpest single-day decline since August, India stock markets lost over 1 percent on Wednesday as jittery investors rushed to take money off the table with the 10-year treasury yields in the US jumping to nearly 16-year highs or highest since 2007.
Typically, bond yields and equity markets work in inverse. Rise in bond yields make it an attractive asset class, as investors tend to sell equities and pump in more money into bonds.
During the day, the BSE Sensex tanked 868.70 points before closing at 66,800.84, losing 796 points or 1.18 percent. The 50-share index Nifty also declined 313.5 points, closing for trade at 19,901.40, down 231.90 or 1.15 percent.
Milind Muchhala, executive director, Julius Baer India, feels there are potential sources of intermittent volatility, such as the US Federal Reserve’s actions, rising commodity prices (especially crude oil), uncertain monsoon impact on crop production, upcoming state elections, and soft rural consumer demand.
“Foreign institutional investors (FIIs) flows, while previously robust, have started tapering off, possibly due to India"s outperformance among emerging markets and potential US Fed rate hikes. It"s important to remain slightly conservative as corrections can be swift. Despite intermittent corrections, the overall positive outlook for Indian markets remains, driven by economic growth, strong corporate earnings, robust expected inflows, and valuations in line with historical averages. Interim corrections should be viewed as opportunities to increase equity exposure for long-term investors," he adds.
Crude prices have been increasing rapidly with brent hitting over $90 per barrel, raising caution on ballooning inflation worldwide as the US Federal Reserve prepares to release its monetary policy review tonight. The global central bank is widely expected to keep interest rates on hold, but market investors will watch out for its economic projections while high crude price may still mean a rate hike this year. In June, the US Fed had paused hiking rates.
Investors in contracts tied to the federal funds rate consider it a near certainty the US central bank will leave the benchmark federal funds rate at the current range of between 5.25 percent and 5.5 percent, a step consistent with the Fed"s shift to a slower and more considered pace of rate increases, according to Reuters. From March 2022 through May 2023, the Fed raised rates at 10 successive meetings—by anywhere from a quarter to three quarters of a point—as it fought the worst rise of inflation since the early 1980s.
In India, a 30 percent rise in oil prices makes both equities and economy vulnerable as higher oil prices increase utility, freight and transportation costs, adding to inflation. A 10 percent oil price increase is estimated to hit retail inflation by an average 0.2 percentage point. This is an adverse terms-of-trade shock for Asia, since most Asian economies are net oil importers. According to Nomura, if oil prices remain high, it will hurt growth, inflation and worsen both current account deficit and fiscal balances.
First Published: Sep 20, 2023, 18:00
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