Rate hike fears, crude oil prices spook D-Street; Sensex slips 1,024 pts

India’s benchmark indices fell for the third straight session on Monday as rate hike fears, rising bond yields, and high crude oil prices hurt investor sentiment, triggering risk-off bets. Most global markets traded weak, but India was the worst-performing market in Asia. European markets fell over 2 per cent following the European Central Bank’s (ECB's) surprisingly hawkish turn.

The Sensex fell as much as 1,346 points, or 2.3 per cent, before recouping some losses. The index ended the session at 57,621, a decline of 1,024 points, or 1.75 per cent. The Nifty, on the other hand, slipped 303 points, or 1.73 per cent, to settle at 17,214. The decline – the biggest since January 24 – eroded investor wealth by Rs 2.9 trillion.

Both foreign portfolio investors (FPIs) and domestic investors were net sellers on Monday to the tune of Rs 1,157 crore and Rs 1,376 crore, respectively. The India VIX index soared 8 per cent, underscoring investors’ anxiety. So far this year, FPIs have been net sellers of stocks worth Rs 42,082 crore, according to the data from NSDL.

Stronger-than-expected jobs data in the United States has raised fears that the US Federal Reserve would be under pressure to impose a steep interest rate hike. The US economy added 467,000 jobs last month despite a surge in Omicron cases.

Oil prices cooled off a bit on Monday after posting their seventh straight weekly gain. Brent crude has rallied more than 20 per cent this year to touch nearly $95 a barrel amid improving demand and supply outages. Many analysts expect crude oil prices to cross $100 a barrel soon.

The domestic market has not just given up all post-Budget gains but also slipped into negative territory for the year. During the first fortnight of 2022, the market had risen more than 6 per cent but failed to build on as the rising inflationary pressure forced global central banks, mainly the US Federal Reserve, to signal a reversal of easy monetary policy.

The uncertainty around interest rate hikes has caused volatility in the market. Out of the 25 trading sessions in 2022, the Sensex has ended with a gain or loss of more than 1 per cent on 13 occasions.

Analysts say investors are now grappling with the prospect of the steepest monetary tightening in decades. Moreover, the US inflation report, which is expected this week, is likely to be above 7 per cent, the highest in four decades. Central banks across the globe are on a sticky wicket as an economic rebound from the pandemic and surging inflation are putting more pressure on them to end the stimulus measures, which propelled risky assets since March-end 2020.

The US 10 -year bond yield was hovering near its two-year high at 1.91 per cent. The continuing rise in oil prices has intensified fears that the Reserve Bank of India (RBI) may have to hike rates as early as this week.

“Inflation needs to be put in place, and the borrowing requirement is also pretty high. The RBI will have to turn a bit hawkish with the US 10-year bond yield nearing 2 per cent. It seems the markets have decided that the Fed hike will be steeper than anticipated. It is only domestic investors who have been buying for several weeks now. If the markets continue to fall like this, one is doubtful whether the domestic support will sustain. Moreover, the good results have already come, and positive cues from earnings will be minimal from hereon,” said U R Bhat, co-founder, Alphaniti Fintech.

The RBI has deferred its three-day monetary policy meeting by one day. The outcome of the meeting will now be known on Thursday.

“We expect that the markets will continue to remain volatile on the back of the recent interest rate movements globally. Most emerging markets will continue to witness FPI outflows and currency depreciation in the short term. We believe that this volatility should be bought into through regular investments, as earnings expectations for Indian corporates remain strong. Some sectors that can perform well in the short term are banks, commodities and energy,” said Naveen Kulkarni, chief investment officer, Axis Securities.

The market breadth was weak on Monday, with 2,149 stocks declining on the BSE against 1,371 advances. All but five Sensex components declined. HDFC Bank and HDFC contributed most to the Sensex decline, falling 3.65 and 2.9 per cent respectively.