Market Crash: Indian benchmark indices BSE Sensex and NSE Nifty 50 were trading 1 per cent down on Friday, as the market participants feel that aggressive rate hike by US Federal Reserve and slowing Chinese economy could weigh on global economic growth. Key indices Nifty50 dropped over 150 points to trade below 17,500 levels and the S&P BSE Sensex tumbled over 700 points to hit a low of 58,406 levels.
Banks and financial services were the most dumped stocks as Nifty Bank lost around 2 per cent led by losses in heavyweight and D-Street favourite HDFC Bank.
According to analysts at ICICI Securities, given the Fed’s growing aggressive stance to tame inflation, the US may enter a recession by second quarter of FY23.
Besides, Fed has clearly signalled that it is willing to tolerate a recession to get inflation back in control. On Thursday, the US Fed raised the rate by another 75 basis. In addition, its updated economic projections showed slower GDP growth and higher inflation.
Key Factors Why the Stock Market is Falling
US Fed’s Aggressive Stance
On Thursday, the US Fed raised the rate by another 75 basis points and surprised the markets by projecting further sizeable hikes in the coming months. Analysts now anticipate Fed to hike rates aggressively by another 75 bps in November, 50 bps in December and a final 25 bps hike in February 2023.
Cut in India’s Economic Growth Estimates
A number of agencies have revised downwards their forecasts for India’s economic growth after June quarter GDP data showed Asia’s third-largest economy had expanded at a slower-than-expected 13.1 per cent from a year ago.
The Asian Development Bank (ADB) has pared its 2022-23 growth projection for India’s economy to 7 per cent from 7.5 per cent estimated in April. Fitch Ratings slashed its forecast for India’s economic growth to 7 per cent for FY23 from 7.8 per cent announced earlier, citing elevated inflation and higher interest rates. It also cut the forecast for the next fiscal to 6.7 per cent from 7.4 per cent.
Moody’s trimmed its real growth forecast to 7.7 per cent for calendar year 2022 from an earlier projection of 8.8 per cent.
Goldman Sachs trimmed its FY22 growth forecast for India to 7 per cent from 7.6 per cent. Morgan Stanley said there is a downside risk of 40 basis points to its growth estimate of 7.2 per cent for FY23. Citigroup has slashed its FY23 growth projection to 6.7 per cent from 8 per cent.
Falling Rupee
The Indian rupee, which breached the 81-mark against the US dollar for the first time to hit a low of 81.23, was also putting additional pressure on the Indian equity market. Rupee depreciation makes India less attractive to FIIs.
Bond yields
The benchmark 10-year US Treasury yield jumped to 3.7180 per cent, its highest level since 2011, while the two-year yield hit a fresh 15-year high of 4.1630 per cent on Thursday.
Back home, the benchmark Indian 10-year government bond yield was at 7.3821 per cent and has cumulatively risen 20 basis points during the last seven sessions.
RBI Policy
Traders are now awaiting the next RBI policy and its action to smoothen the liquidity and talk about the current run in the currency and falling reserves. Analysts expect RBI to raise rates by 50bps versus 35bps previously and a 35bps hike in the December meeting from 25bps previously, with upside risk to the forecast if commodity prices are higher in the fourth quarter of FY23. RBI may also hike rates by 50bps in 2023 from 75bp previously which would take the repo rate to 6.75 per cent by April 2023, say analysts. The next RBI policy will be on September 28-30.
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