Expect Some Serious Consolidation
It was an eventful week for the Indian markets not only because the key benchmark indices logged a fresh all-time high but also for the fact that some vital data unfolded during the last seven days. The week started with the announcement of India’s retail inflation data which is measured by the Consumer Price Index (CPI). It jumped to 6.3 per cent in May on account of higher food and energy prices. Once the market participants were past this data, they waited with bated breath for the outcome of the US Federal Reserve meet. And on Wednesday, when the big event unfolded, it turned out be one of those rare occasions when the markets reacted negatively.
Meanwhile, there were no shocks or surprises on the monetary policy front as rates held at 0-0.25 per cent. But what pinched the market participants was Federal Reserve’s signal that the central bank expects to hike rates by 2023, which is much sooner than previously projected for 2024. Moreover, it expects not just one rate hike but two by the end of 2023. Amid this hawkish shift, the silver lining is that the Federal Reserve has indicated that the US economic activity is recovering strongly. It has increased the GDP forecast for the current year to 7 per cent from the earlier 6.5 per cent.
We believe that even though the US Federal Reserve has signalled a rate hike sooner than expected, the actual decision to hike rates is always dependent on real economic data, not just based on insight or perception. Typically, the hikes are only seen after economic activity has picked up materially. In addition, as the markets have seen historically, anticipation of rate hikes can make things volatile for a while. But once the hike hits, the impact is not as dramatic. Talking specifically about the Indian markets, they have seen a correction in the past two trading sessions and investors have turned jittery as the US dollar index has surged above the 91.5 mark.
Remember it was not a long back that it was about to cross the 90 mark on the way down. The US bond yield is back to 1.56, but we believe that the markets have digested such things in the past and yes, there have been shakeouts but then once again moved on to winning ways. Thus, a similar kind of reaction could be witnessed again. That said, in the near term pain may be visible and volatility could shoot up. This is what we had warned about in our last editorial – that a low volatility regime is often followed by a highly volatile period. As a result, we have seen a pullback in India VIX from the lower levels.
Our feeling is that volatility would continue to surge in the near term. The Nifty has moved nearly about 12 per cent from the low of 14,151 to a high of 15,901.60 and after this stupendous rally we anticipate some meaningful pullback in the markets or some serious consolidation. And this pullback or bouts of volatility should not be perceived as bad. Instead, traders can use this temporary breather to their advantage to build long positions by accumulating quality stocks from the sectors, which are seeing a structural shift as the level of 15,400-15,450, is likely to act as an important support for the index in the near term.
