Bears Bug the Markets Big Time
When it comes to surprising the markets, central banks do seem to take the lead. This time too, the central bank i.e. the Reserve Bank of India surprised the markets big time, stunning the market participants by going for a rather abrupt 40 basis points hike in policy rate, accompanied by hike in CRR rate by 50 basis points. The evolution of RBI’s assessment since February now constitutes a U-turn. This is somewhat logical given the extraordinary events that have since transpired. The war in Ukraine is in its third month with no end in sight, which has put massive upward pressure on a host of commodities.
This has thrown the expected inflation trajectories into a chaos. More importantly, we should not lose sight of the fact that inflation is being fuelled by international factors and a monetary policy has only limited room to affect this imported inflation. The drivers of inflation are global. Hence, we need to understand that action needs to be taken on multiple fronts, not just through a monetary policy. Now, let us come to what this rate hike means for the economy and what impact it would have on certain sectors which were only now beginning to recapture their pre-pandemic animal spirits.
This out-of-the-syllabus rate hike would impact the nascent recovery process in sectors such as housing and real estate, which have a big multiplier effect on the economy. Furthermore, higher finance costs could also overcast demand for consumer goods and extended the pain for the automotive sector which is already reeling with plenty of problems like rising input costs and scarcity. Meanwhile, the US Federal Reserve delivered the first 50-basis point rate hike since the year 2000 and the central bank also outlined a process to slash its balance-sheet, which was widely expected.
However, the key take-away from the Federal Reserve meeting was the 75 basis point increase was not on the cards and testimony of this is a statement from Jerome Powell who said that “half-point rises remain on the table for the next couple of meetings”. This acted as music to the bulls’ ears and thus the US’ stock ended sharply higher. With the FOMC rate hikes out of the way and fears of super-sized hikes behind our back, the Indian market opened in the green and Nifty touched a high of 16,944.40, which was about 61.8 per cent retracement level of Wednesday’s fall.
However, in the second half of the trading session profit booking emerged and Nifty slipped nearly 250 points from the day’s high. The key take-away from Thursday’s session was that the bears were not able to pierce Wednesday’s session low. However, given the fact that markets failed to hold on to early gains and gave away all the gains once again tells us that the sentiment on D-Street remains very poor. If you want to check in numbers, these too present the same picture as all the indices of NSE from last Thursday to this Thursday have delivered negative returns.
All this negativity and spike in bearish sentiment reminds me of the famous saying, ‘The time to buy is when there’s blood on the streets.’ But should one buy equities with both hands? In the short-term, volatility is likely stay elevated. That said, Nifty has strong support around the zone of 16,300-16,400 and hence investors should start accumulating stocks around this level, but alas, with a more thoughtful approach. Buying should be confined to stocks and segments which are fairly valued or have good earning visibility. Our understanding is that we remain in a secular bull market – one that has enjoyed substantially excessive returns over the last one and half years. In the long run, these declines are just noisy ways to work off excesses in one direction or another.
