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We’re almost six months into the calendar year 2022 and equity benchmark indices continue to fall. Investors tread cautiously amid soaring inflation and rising rates. Commodity prices have escalated and supply chains are disrupted around the world.

Domestic equity benchmarks opened gap-down on Monday, with the Nifty at 15789.50 levels and the Sensex at 52866.36 levels. Both the indices were down by more than 2.50%. Further, Nifty Bank was down 3.40% at 33312.40 levels. Though India Vix is hovering at 20, it has been on a decline from May’s peak of 25.6. 

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“Global markets are falling as investors remain concerned about the global economy while awaiting key data about inflation. The combination of slowing growth and rising prices has raised concerns of stagflation where growth stalls but inflation drives up prices. Moreover, the Russia-Ukraine crisis continues to impact market sentiments,” said Mitul Shah, head of research at Reliance Securities.

Here are a few reasons why the markets are falling:

CPI Inflation and rate hikes

Investors are waiting for consumer price index data for May on Monday. A Bloomberg poll expects CPI to grow 7.1% for May versus 7.79% in April. The RBI has already hiked the interest rates for a second straight month to 4.90% and intends to step up its fight to tame prices that have been running above its target band since the beginning of this year.

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Rate hikes in the US and the global recession

The US Fed is expected to hike rates by 50 basis points this week. Economists worry that a recession could occur in 2023, especially if the Fed’s interest rate hikes stifle demand from individuals and businesses or if its inflation strategy fails. This might affect the Indian markets too.

FIIs’ behaviour

“It will be crucial to see FIIs’ behaviour amid panic in global equity markets because they are selling relentlessly for the last 8 months,” according to Santosh Meena, Head of Research, Swastika Investmart Ltd.

The Dollar is at its strongest

The Indian Rupee hit a low of ₹ 78.24 per US dollar on Monday. The Dollar has been on the front foot, thanks to the weakness in the emerging market currencies and a surge in US treasury bond yields.

The ECB’s intention to hike rates

The European Central Bank on Thursday had confirmed its intention to hike interest rates for the first time since 2011. It might hike interest rates by 25 basis points in July and increase them further in the September meeting.

Expensive crude oil

Crude oil continues to remain expensive amid intensifying geopolitical tensions between Russia and Ukraine and tightening by global central banks. With this, India’s current account deficit is likely to hit a three-year high of 1.8% or $43.81 billion in FY22, as against a surplus of 0.9% or $23.91 billion in FY21, according to India Ratings.

Rising covid cases

Another major reason that dragged the markets was the rising number of Covid cases in India. Maharashtra is the most affected state followed by Kerala. India’s Covid-19 tally crossed the 8k mark for the third day in a row. It reported 8,084 new covid cases, taking the number of active cases to 47,995.

The reimposition of a lockdown in Shanghai

Further, China’s business hub, Shanghai has been put under restrictions yet again. A lockdown has been reimposed in the city and is weighing on markets, as supply disruptions threaten India Inc’s profitability prospects.

Experts say that the undertone for Monday is negative, however, a close below 16160 points could invite bulls. They say that traders are unlikely to be as surprised as in 2020 when the VIX peaked at 83.6 in March, rising from sub-15 levels in January. It is usually at 20, these days, suggesting that traders have systematically got acclimatised to a higher volatility environment. 

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