Several market experts believe that Indian stock markets are likely to continue to rise in 2022 as well, citing some positive factors — such as a pick-up in domestic economy, China+1 strategy adopted by global investors as global companies want to overcome supply chain disruptions and dependence on China, the continuous reform agenda pursued by the Union government and stable policy regime.

However, we highlight key risk factors that can potentially change the direction of the current bullish market.

The foremost among them is the US Federal Reserve’s policy decisions. Though the US Fed has not hiked rates so far, it has already signalled a hawkish stance next year. It expects to raise policy rates three times in 2022 and three times in 2023 based on median projections. Besides, the US central bank has also announced plans to taper its bond purchases. If US Fed acts more quickly on these fronts, then that could arrest easy liquidity and hurt emerging markets such as India more, which until now enjoyed a free flow of foreign funds.

The next major factor is newer variants of Covid-19. Despite Covid being a factor for over two years now and rising vaccination coverage of people across the globe, there are no signs that it will go away anytime soon. With new variants emerging every now and then, the virus is taking new names and shapes, no one knows when the world will be out of this major threat. Any more potent variant could threaten global economic recovery.

Investors should also watch out for inflation numbers. Of late, inflation is rising both domestically and globally. Both consumer price index and wholesale price index have been climbing in the recent past. November headline CPI inflation rose sharply to 4.91 per cent and the whole sale price inflation to over 14 per cent. India Inc is facing input cost pressure and if Reserve Bank of India resorts to rate tightening, then it will act as a double whammy for earnings.

The last two months have witnessed increased selling pressure from foreign portfolio investors. For the 28th straight day (on December 24), FIIs remained net sellers in Indian cash segment. Though their selling slowed down a bit in the last couple of days, they don’t seem to be very comfortable with Indian market valuation. A Credit Suisse report said that, compared to the last five-year average, the Nifty index is currently trading at a 9.3 per cent higher valuation or 20.1 (as of December 17) and at the peak, the valuation touched 22.8 times in October.

Another important factor is the outcome of the Uttar Pradesh assembly election. If the ruling BJP government loses the poll, then that will push the Centre to rethink on its reform agenda. Any signal of going slow on reforms will hurt market sentiment badly. One of the major reasons why investors are betting on Indian equities is the continuous reform agenda of the current government.

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