Rate hikes and downward pressure to weigh on markets

By Arun Kejriwal

Markets were under pressure on expected lines and lost on four of the five trading sessions. Thursday was the sole exception for the week when markets recovered ground quite sharply driven and led by one stock. BSESENSEX lost 1,465.79 points or 2.63 per cent to close at 54,303.44 points, while NIFTY lost 382.50 points or 2.31 per cent to close at 16,201.80 points. The broader markets saw BSE100, BSE200 and BSE500 lose 2.17 per cent, 2.07 per cent and 2.06 per cent, respectively. BSEMIDCAP lost 1.25 per cent, while BSESMALLCAP lost 2.00 per cent.

The Indian Rupee was under pressure and lost 21 paisa or 0.27 per cent to close at Rs 77.83 to the US Dollar. Dow Jones had a torrid week losing 1,506.91 points or 4.58 per cent to close at 31,392.79 points. Inflation in the US is at its highest levels since the 1980's and people are getting really worried. Some leading brokerages have put out warning signals that the FED hike on Wednesday could be as steep as 75 basis points. In any case in an economy which has been under a virtual zero interest regime for so many years seeing such rises would be unprecedented and unimaginable. How markets would react is anybody's guess.

Reliance industries turned the tide on the only day when markets gained on Thursday. The share gained from the day's low of Rs 2,709 to close at Rs 2,799, marginally below the high of the day of Rs 2,802. The day's gain was Rs 84 or 3.09 per cent. Thursday was a weekly expiry and saw huge volatility and short sellers being sent to the cleaners. It's a different story that Reliance ended the week at Rs 2,714 down Rs 66 or 2.37 per cent for the week.

RBI raised rates at its monetary policy meeting which concluded on Wednesday. RBI raised repo rates by 50 basis points to 4.90 per cent. This is the second hike in the current financial year 2022-23. Earlier it had hiked rates by 40 basis points in an off-cycle meet. RBI believes that inflation would remain high for another two quarters and would then fall below the tolerance level. It expects CPI inflation to remain at 7.5 per cent in Q1, 7.4 per cent in Q2, 6.2 per cent in Q3 and 5.8 per cent in Q4. RBI believes that inflation would gradually slow down and expects inflation at 6.7 per cent for the year 2022-23. Analysts believe that if inflation is controlled at levels as stated it would be a great thing.

Immediate impact of the rate hike has been felt on the housing sector with home loans seeing an increase in interest rates. How the housing or real estate sector behaves would take some time for clarity to emerge.

Global markets are awaiting the FED action at its meeting on Wednesday where rates are to be raised for sure. By how much is still being debated. Markets in India would react to the news on Thursday when they open for trading.

Market intermediaries in India have over the last couple of quarters been talking about continuous FII selling and the fact that this is dampening market sentiments. While there is no one way of looking at things, the fact that domestic institutions led by mutual funds have been matching FII sales on a regular basis by continuously buying is not helping matters. They (FII) are getting a comfortable exit without losing any sleep or money. They are exiting quite comfortably, making money on their sales and awaiting better days to buy. FII's are selling in all comparable markets like India, simply because free money is no longer available. There is a cost to money and that is increasing quite rapidly.

I believe, if the domestic institutions allow FII's to sell without absorbing them, they would stop at a particular level because they would be destroying their own exit plan. It's a way of looking at things and also a way to present things. One does understand that domestic inflows through SIPs and normal schemes is quite strong and many a times compels mutual funds to invest.

One more week has lapsed without any activity in the primary market and nothing likely to happen either in the coming week. The present conditions in the market and the fact that this new rampant system of applications after being bid, and not being banked is hurting the system. Bankers have a little over two and a half months till 1st September 2022 to set the system right.

Coming to the week ahead it appears that the levels of 16,400-16,450 on NIFTY and 55,000-55,200 on BSESENSEX have been broken and maybe decisively this time around. The fall in the US on Friday and the concern emerging post inflation numbers and expected rate hike on Wednesday will not allow markets to breathe easy. In such a scenario, even if markets don't fall, they will at best drift. In either case with each passing day and lower levels being touched, resistances at upper levels would become stronger. The closest level of support for the markets continues to be around 53,450 and 15,900 levels on the BSESENSEX and NIFTY respectively. Below this we have levels at 52,700 and 15,700. One must remember that markets have a tendency to reverse direction temporarily before breaking key supports or resistances. On the upside while strong resistances are at 55,200 and 16,400. Beyond this it looks difficult currently.

News flow is the other way that markets may revive. Currently no such expectation of news exists. The Russia-Ukraine war is over 100 days old and each passing day adds to the count, not a resolution. Results season for the quarter April-June is almost a month away. Inflation is taking its toll and the ability of manufacturers to pass on price hikes is disappearing and becoming much tougher.

Trading strategy would be to sell on rallies and wait to re-enter. Opportunities to enter again would be available in plenty. Trade cautiously and use sharp swings to enter markets in a select group of stocks.

(Arun Kejriwal is the founder of Kejriwal Research and Investment Services. The views expressed are personal)

Source: IANS