The Indian equity benchmarks were trading a percent lower on April 12 morning, ahead of the release of domestic and US inflation data later in the day. The RBI’s "hawkish" turn and earnings season were also weighing on sentiment, experts said.
Indian shares have traded lower in the last five of the last six sessions, with the Sensex and the Nifty shedding 3.6 percent each, as investors assessed comments from the US Federal Reserve on its monetary policy tightening.
At 11 am, the Sensex and the Nifty were down a percent each at 58,418 and 17,509. Here are the factors pulling the market down:
1 US inflation worries
US inflation data will be out later in the day. Consumer prices probably rose 8.4 percent in March from a year ago, according to a Bloomberg survey of economists.
The minutes of the US Federal Open Market Committee (FOMC) meeting indicated that the Fed had agreed to begin winding down the balance sheet at the rate of $95 billion a month, likely starting in May.
The officials "generally agreed" that a maximum of $60 billion in treasury securities and $35 billion in MBS would likely be appropriate.
With regards to rate hikes, the minutes noted that many participants considered "one or more" 50 basis point increases in the federal funds target range to be appropriate at future meetings.
2 RBI's ‘hawkish’ turn
The markets were under pressure as investors weighed the likelihood of rate hikes after a hawkish turn by the Reserve Bank of India (RBI) at its policy review on April 8.
In a surprise move, the RBI’s monetary policy committee (MPC) introduced the Standing Deposit Facility (SDF) and set it as the floor for the LAF corridor at 3.75 percent, replacing the reverse repo rate, which was left unchanged at 3.35 percent.
The policy corridor has now been restored to the pre-pandemic width of 50 bps. While maintaining the repo rate and accommodative stance, the MPC was guided towards withdrawal of the accommodative stance.
The MPC also revised up its FY2023 inflation projection to 5.7 percent from 4.5 percent and revised down its FY2023 real GDP growth projection to 7.2 percent from 7.8 percent.
"While the change in the policy stance to neutral in the June policy is broadly given, we see the first rate hike timing between June and August as a very close call. Much will depend on the upcoming inflation prints as the RBI clearly risks the average for three quarters being higher than 6 percent, "Kotak Institutional Equities said in a note to its investors.
"The next steps towards the withdrawal of accommodation will be changing the stance to neutral (we expect this in the June policy), repo rate hikes (retaining 50 bps hike in FY2023 with the first hike in August), and sterilizing incremental liquidity (over the medium term), if any," the note added.
3 India’s inflation woes
Investors will be keenly watching India's consumer price inflation (CPI) data to be released later in the day. Analysts expect March CPI inflation to increase further to 6.37 percent from 6.07 percent in February, taking the 4Q FY22 average to 6.15 percent.
They also expect core CPI inflation to increase to 6.44 percent in March, up from 6.42 percent in February.
"The near term will continue to face upside risks from elevated global commodity prices and the persistence of supply-chain disruptions. Given these risks, we expect CPI inflation to average 5.8 percent in FY2023. With regards to the IIP (index of industrial production), we expect the February reading to grow by 2.3 percent compared to 1.3 percent in January 2022, "Kotak report said.
4 Q4 earnings
Analysts believe that consumer-focused companies such as automobiles, cement, and fast-moving consumer goods (FMCG) may either see profits shrink or stay stable for the March quarter.
Input cost inflation is expected to bite into margins in a big way, and modest consumption demand will continue to be a drag as well.
Analysts at Kotak Institutional Equities expect the aggregate net profit of the companies belonging to the BSE-30 Index to expand by 26 percent year-on-year for Q4FY22. The Nifty 50 companies may report a net profit growth of 27 percent.