Mr. Mitul Shah - Head of Research at Reliance Securities.
Indian equities closed sharply lower, tracking weakness in global markets as investors mulled over the recent inflation data. Nifty declined 1.9%, Nifty Mid Cap was down 2.9% while Nifty Small Cap fell 2.6%. All sectoral indices ended in red. Nifty Media was the major laggard which plunged 4.1%, followed by Nifty Reality and Nifty IT which dipped 3.7%. Meanwhile, the RBI is expected to continue its hawkish stance and likely to raise interest rates by 50bps in its upcoming policy meet. Moreover, the April-June CAD is expected to spike to highest in nearly a decade according to a Reuters poll. Higher commodity prices and the Rupee at 80 contributed to the worsening trade gap and bloating the CAD. The median forecast in Reuters poll of 18 economists on 9-15 Sep'22 showed India's current account deficit last quarter was $30.5bn, or 3.6% of gross domestic product, the widest in nine years.
U.S. equities closed lower in a volatile session as investors mulled over inflation report and the likely hawkish path of FED. The S&P 500 fell 1.1%, the tech-focused Nasdaq Composite dropped 1.4% while the Dow fell 0.6%. The 10-year Treasury yields rose to 3.458% from 3.411% on Wednesday. Data from the Commerce Department showed that retail sales rose 0.3% in Aug'22 despite high inflation. U.S. applications for unemployment benefits declined for the fifth consecutive week. Meanwhile, a report showed that industrial production registered a slight downtick and dropped 0.2% from July. Moreover, mortgage rates topped 6% this week, their highest level since 2008. According to a survey, the average rate on a 30-year fixed mortgage climbed to 6.02%, up from 5.89% last week and 2.86% a year ago. The last time rates were this high was during the financial crisis almost 14 years ago, when the U.S. was deep in recession. The jump in mortgage rates is one of the most pronounced effects of the Federal Reserve's campaign to curb inflation by lifting the cost of borrowing for consumers and businesses.
India's retail inflation CPI surged to 7% in Aug'22 due to higher food prices, as against 6.71% in Jul22. The index has remained above the RBI's comfort zone of 2-6%. Spill-overs from geopolitical shocks are causing considerable uncertainty to the inflation which is likely to remain at elevated level in the near-term due to higher energy and food prices. Meanwhile, U.S CPI also rose 8.3% YoY in Aug'22, down from 8.5% in Jul'22 but above market's expectation of 8%. India is trading at premium valuations compared to emerging markets on high growth expectations. We expect the outperformance to continue given the FII investments and strong macros for the Indian economy. India's GDP data for Q1FY23 came in at 13.5%, and GDP growth is expected to sustain at 7% in FY23, which is the highest among emerging markets. We expect strong economic rebound, normalised commodity prices and better visibility in the near term, and expect inflationary pressures to cool down towards the end of FY23.