According to Prashanth Tapse, Vice President (Research), Mehta Equities Ltd, “Investors are likely to feel heat in the short term as central banks across the globe try to curb inflation by hiking interest rates.”

Rising oil prices have also been impacting market sentiment. Oil prices rose on Thursday, extending gain after the EU announced plans for new sanctions on Russia, including an embargo on cruise oil in six months. Brent Crude climbed to over $110 per barrel.

Global cues, inflation concerns, the Covid-19 situation and development on the Russia Ukraine crisis will remain key factors to watch for investors, according to experts.

RBI announcement

On the domestic front, ahead of the US Fed announcement on rate cuts, in a surprising move, the Monetary Policy Committee (MPC) on Wednesday unanimously voted to raise the policy repo rate by 40 basis points from 4 per cent to 4.40 per cent with immediate effect, in a clear indication that inflation may be spiraling into higher levels than anticipated. It also announced increase in the Cash Reserve Ratio (CRR) by 50 basis points (bps) from 4 per cent to 4.50 per cent.

The surprise move by RBI has dampened market mood and may impact the divestment target of the government, as per analysts.

Market was expecting a hike at the next MPC meeting. However, the move was larger and earlier than expected.

Prasenjit Basu – Chief Economist, ICICI Securities said, “The persistence of high crude oil prices, and uncertainty over the length of the Russia-Ukraine war, have resulted in sustained inflationary pressure globally.”

“If the Russia-Ukraine war persists beyond May and June, more rate hikes will be needed. If there is an early end to the war (within the next five to six weeks), global inflationary pressures will ease, reducing pressure for further rate hikes. The whole structure of interest rates will harden, implying loans will be costlier and fixed deposits more attractive. The equity markets will take a negative hit, especially since this was a surprise inter-meeting hike,” said Basu.

Naveen Kulkarni, Chief Investment Officer, Axis Securities said, “Geo-political tensions continued to weigh on the global supply chain, commodity and food prices, along with oil price increases, resulting in higher inflationary pressures.

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The rate hike comes as a major surprise, which has rattled both bond and equity markets.”

“The impact of a rate hike will be significant on equity markets. The potential downside has increased, and the upside in the near term is capped,” added Kulkarni.

According to Sorbh Gupta, Fund Manager - Equity, Quantum AMC, RBI’s surprise move on increasing the repo rates is an acknowledgment of inflation becoming a more important variable in policy decisions than growth.

As per Gupta, it will not have an immediate bearing on growth in inflation but it is an indication of things to come.

Technical outlook

Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities Ltd said, “The market closed below the crucial level of 16,800 on the back of a negative result, which would push the market further down to 16,400/16,200 in the near term. On the upside, 16,800/16,900 would act as the biggest hurdle. Reducing weak long positions is advisable near 16,800 levels and contra buying is recommended only around 16,200 and below.”

“Technically, Nifty has already given up 16,807 support. Below 16,807, the next key level to watch is the 16,597 mark. Expect waterfall of selling below the 16,597 mark towards 15,900-15,921 mark,” as per Tapse.

FII selling

Foreign institutional investors (FIIs) continued their selling spree, net selling shares worth ₹3,288.18 crore on Wednesday, May 4, while domestic institutional investors (DIIs) were net buyers. DIIs net bought shares worth ₹1,338 crore on Wednesday, as per provisional data available on the NSE.