Over recent weeks, the Indian markets have been marked by high volatility, influenced by a range of domestic and global factors. These include the rise of the US dollar index, a surge in US Treasury 10-year bond yields, selling by Foreign institutional investors, a sharp rise in inflation, and the Indian rupee hitting an all-time low against the US Dollar.
The Nifty 50 displayed a consistent upward trend from March to July, resulting a substantial gain of 14.5%. This period also saw the index reach an all-time high of 19,991. However, in the present month, the index has undergone a decline of 1.4%.
The index began its downward trajectory after the IT major Infosys posted a weak set of numbers for Q1FY24, coming short of analysts' expectations, triggering a downturn, impacting not only Infosys but also other IT stocks.
Between August 01 and August 03, the Nifty 50 experienced a decline of 1.8%. This drop was prompted by Fitch's decision to downgrade the United States' Long-Term Foreign-Currency Issuer Default Rating (IDR) from AAA to AA+. This move came despite the resolution of the debt ceiling crisis two months prior.
A week later, Moody's also downgraded the credit ratings of 10 major US banks and indicated a review of the status of several prominent lenders. The rise in the US annual inflation rate to 3.2% in July from 3% in June added to the uncertainty. This development fueled expectations that the Federal Reserve would prolong higher interest rates to combat inflation.
The US dollar index, a measure of the dollar's strength against a basket of six major currencies, surged to a five-week high of 103 during Monday's trade, fueled by hotter inflation. Conversely, the Indian rupee depreciated by 29 paise against the US dollar, hitting an all-time low of 83.11. According to analysts, foreign fund outflows also weighed on the local unit.
Foreign institutional investors turned net sellers on Monday, offloading equities worth ₹2,324.23 crore. Prior to this on Friday, they sold shares worth ₹3,073.28 crore.
In addition, July CPI inflation came in higher at 7.44%, the highest since April 2022, led by a sharp surge in food inflation to 11.51%, the highest since January 2020, driven by the cost of vegetables, spices, cereals, and pulses.
During the third bi-monthly policy for the financial year 2023–24, the Central Bank of India (RBI) revised its inflation forecast to 6.2% in Q2, 5.7% in Q3, and 5.2% in Q4. Looking ahead to the first quarter of the fiscal year 2024–25, the RBI has set its inflation forecast at 5.2%.
"The takeaway from this is that a rate cut can be expected only in H2 of CY24. This is negative for rate sensitives. So, the banking sector, which has been a pressure point for the Nifty, is likely to experience more near-term pain," said Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
"But for long-term investors, the correction can be an opportunity since the sector is doing well and valuations are fair. Defensives like pharmaceuticals and IT will be relatively safe in the near term. The rupee will turn weak," he added.
Meanwhile, Fitch Ratings analyst Chris Wolfe warned that the US banking industry has inched closer to another turbulence, the risk of rating downgrades on dozens of US banks that could even include JPMorgan Chase, Mint reported, citing a CNBC report.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.