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Indian benchmark indices BSE Sensex and NSE Nifty 50 fell over 1.5 per cent to hit the lowest level since 30 Aug 2022, and Bank Nifty index plunged nearly 3 per cent intraday as market participants remained cautious fearing that aggressive rate hike by US Fed, and slowing Chinese economy could weigh on global economic growth. The US Fed clearly signalled this week that it is willing to tolerate a recession to get inflation back in control when it raised the rate by another 75 bps. In addition, its updated economic projections showed slower GDP growth and higher inflation. According to analysts at ICICI Securities, given the Fed’s hawkish stance to tame inflation, the US may enter a recession by the second quarter of FY23.

Tracking, weak global markets following the hawkish Fed commentary, Indian equity markets declined for the third straight day on Friday. “The Fed rate hike was already discounted, but the expectations of further rate hike in the next meeting drag-down the market more. Depreciation in the Indian Rupee against the US Dollar putting additional pressure on the Indian equity market and FII inflows have reduced in September as compared to August. Apart from this the expected rate hike by RBI in its monetary policy meeting scheduled for next week also putting the pressure,” said Akhilesh Jat, Category Manager – Equity Research.

Key factors dragging domestic equity markets

Profit booking in banking stocks: The outperforming index of the last few weeks, Nifty Bank is putting a heavy load on the Indian share market today. Banking stocks are in red due to the sharp rise in USDINR, and the risk of a recession looming all over the world. Next week there is a RBI policy meeting, so there is profit booking in banking stocks, said Vishal Vasant Wagh, Head of Research at Bonanza Portfolio.

Hawkish RBI expectations: The RBI Monetary Policy Committee is scheduled to meet during September 28-30. RBI Governor Shaktikanta Das will announce the MPC decision on September 30, the last date of the meeting. Traders are now awaiting RBI to smoothen the liquidity and talk about the current run in the currency and falling reserves. Analysts expect the MPC to raise repo rate by 50 bps versus 35 bps previously and a 35 bps hike in the December meeting, with upside risk to the forecast if commodity prices are higher in the fourth quarter of FY23. Investors are cautious anticipating hawkish commentary from the central bank as inflation rose back to 7% in August.

Shrinking liquidity: The banking system liquidity slipped into a deficit for the first time in forty months. The change in the liquidity situation has come due to advance tax outflows for the second quarter. In order to smooth the liquidity, RBI conducted Rs 50,000 crore Variable Rate Repo (VRR) auction on Thursday. According to analysts, there will be demand for funds going forward as the festive season begins. RBI is monitoring the situation and will take necessary steps, they added.

Lofty valuations: India’s premium valuation to its global peers and other Asian markets is unsustainable, said BNP Paribas in a note recently. “Amid slowing global demand, lofty market valuations, a slowdown in retail flows and lack of positive catalyst for our earnings estimates, we remain cautious on the overall market returns in the near term,” BNP Paribas said adding, “historically, at this level, market returns in the next one year have remained muted and thus warrants caution”.

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Cut in India’s economic growth estimates: In the past few days, a number of global rating agencies have revised their forecasts for India’s economic growth downwards after the June quarter GDP data showed that the Indian economy had expanded at a slower-than-expected 13.1% from a year ago. The Asian Development Bank (ADB) cut its 2022-23 growth projection for India’s economy to 7% from 7.5% estimated in April. Fitch Ratings slashed its FY23 GDP growth forecast for India to 7% from 7.8% announced earlier. Moody’s trimmed its real growth forecast to 7.7% for calendar year 2022 from an earlier projection of 8.8%. Goldman Sachs also cut its FY22 growth forecast for India to 7% from 7.6%.