Markets make sharp recovery but volatility is set to remain

Market


Indian markets pared more than a percent of their losses on Wednesday, with the Nifty and the Sensex closing down just 0.37%, regaining the 60,000 and the 18000 levels respectively. A sharp fall in the global equities had meant that markets opened with cuts of almost 1.9%. Other Asian markets had also opened weak on Wednesday following a 4.32% and 5.12% cut in S&P 500 and Nasdaq on Tuesday.

Confidence in domestic economic growth has supported the markets, said experts

“The opening hours of the domestic market mirrored the sharp selloff in the global market, but it steadily recovered as investors gained confidence to bottom fish, because of the brighter prospects for the home economy,” said Vinod Nair, head of research at Geojit Financial Services.

Higher-than-expected inflation print in the US however has again aggravated fears of the hawkish stance of the US Federal Reserve during the September review. Market volatility is thus expected to continue and fresh triggers for the market mostly will depend on the Federal Open Market Committee’s monetary policy meeting on September 20-21.

The consensus is that India remains a “buy on dips” market despite odds shortening of the US interest rate committee voting for yet another jumbo hike of 75 bps later this month to tame inflation at the cost of growth. Most market experts, who confess to be confounded by Indian market resilience in the face of lingering recessionary fears in the US, expect the record high of 18,604 to be tested by Diwali next month.

Higher rate hikes in the US would eventually slow growth in the world’s largest economy, causing the dollar index to weaken from near 20-year highs of 109-110 and this would help emerging market currencies such as the rupee to rise, analysts and economists pointed out. The rupee, however, closed down by about 30 paisa at 79.44 to a dollar on Wednesday because of the global equities selloff and rise in the dollar index. Reserve Bank of India intervention and foreign portfolio investor flows may have capped the advance beyond 79.60, said Anindya Banerjee, vice-president, currency derivatives and interest rate derivatives at Kotak Securities Ltd. The sharp drop in the forward premium could be a sign of RBI selling in forwards. Post US CPI, odds of a 100-bps hike next week have increased, according to Banerjee.

“We are bewildered by the resilience of the Indian markets but there are a number of factors backing that resilience. The Indian economy is not so bad compared to elsewhere and if the AEs and China sink into a recession that would adversely impact commodity prices, which is positive for India, which unlike other EM economies is consumption-driven rather than export-led,” said Andrew Holland, chief executive officer, Avendus.

Foreign investors are “probably” pricing in such a scenario over the next quarter or two and are returning to the Indian market, Holland said.

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