Indian stock indices along with other global markets pulled back on Friday after fresh data showed inflation in the US was at a 40 year high. On Friday, the Sensex and Nifty declined 1.3 percent in line with the global markets and Rupee fell sharply against the Dollar as the inflation numbers spread panic. Sensex closed lower by 733 points at 58,152 and the Nifty index was down 231 points at 17,374. Rupee touched a low of 75.6 against the Dollar.

Stock markets globally are now eying the emergency meeting of the US Federal Reserve next Monday. They fear a 50bps hike in key interest rates and massive scale down in liquidity, since the country saw the fastest rise in inflation in nearly four decades.

US inflation

US inflation accelerated to a fresh 40-year high of 7.5 percent in January, with the annual core rate, excluding food and energy, running at 6 percent, the fastest since 1982. Speculation was rife that the Fed could signal an immediate rate hike and halt its bond buying programme that markets are accustomed to. Hike in the US interest rates and cut down of bond buying by Fed will curtail dollar supply, leading to redemption in global funds. It would force funds to sell equities aggressively to readjust to the new liquidity scenario.

However, experts say the funds have already adjusted partially to the new scenario for the past several weeks by selling equities, which is the reason why global stock markets were trading lower than their lifetime highs and not hitting new levels on the upside.

A view is that if the rate hike in the US is not aggressive then the markets have a strong bottom in place and are ripe for a new rally when the rising oil prices, a key behind the inflation, cools down. Global oil and gas prices have shot up due to the Russia Ukraine milatary standoff US debt is worth several trillion dollars and a 1 percent rake hike this year could flush out hundreds of billions of dollars for servicing the debt if the US interest rates move higher from zero currently.

Global markets

“Global markets are on tenterhooks with a US rate hike imminent and some officials even calling for a 1 per cent hike in the next few months itself. There is a lot of pressure on the US establishment to rein in the surging inflation, but there will be interest cost implications of this move too. Either ways, I do not see the Nifty falling below 16,000 - 16,500 in a worst case scenario. The markets are already in adjustment mode to this event said Rahul Arora, CEO, Institutional Equities, Nirmal Bang. Foreign portfolio investors, who have been selling vigorously since the mid of January, were net buyers of stocks worth ₹108 crore on Friday. But they have sold stocks worth ₹9,712 crore in cash since the budget announcement on February 1. In the index futures segment they were net sellers of 1,052 crore and sold stock futures worth ₹1,013 crore. Hours after India’s markets closed, the US index futures staged recovery and were trading in the positive zone ahead of the market opening. This was after the news reports suggested that the Fed will not advance its interest rate decision to Monday from its schedule in mid-March. Also, reports suggested that an instant 50 bps rate hike may be avoided. According to Bloomberg the centrists among the top Fed officials appear skeptical of a half-point hike and are suggesting there is little need to start a hiking cycle with an aggressive move. “For the coming week, we expect the Nifty to trade within (18,300 and 17,040) range and only a breakout on either side would lead to the next directional move,” said Ruchit Jain, Lead Research, 5paise.com.  Markets in India are likely to focus on policy making once elections in five states end and the results are declared on March 10. Till then, the government is likely to be slow in taking controversial decisions on divestment to avoid any political controversy, experts said.

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