An abrupt rise in 10-year bond yields to a one-year high of 1.6 per cent heightened concerns over inflation, which led to the sudden drop in US indices. And if the yields continue to rise, FPIs who have been aggressively investing in Indian markets since the past couple of months could pull the plug and turn their attention back to the states for higher returns.
This will have a negative impact on the rupee, which may depreciate further as the demand for the dollar increases. But again, this is a matter to worry about in the future. Currently, the fact is that bond yields haven’t reached worrying levels, and this is a correction in the long bull run. As long as inflation increases and remains under control, equities are expected to improve with corrections.
Inflation can be looked at like a burning flame, as long as the flame is low, there is no harm but on a higher flame, there could be a risk of getting burnt.
Global commodity price hikes are adding to the brewing inflation. With commodity prices on the rise, manufacturers will have to pay more for raw materials, which will in turn be passed on to the consumers at some point indirectly, leading to a rise in CPI. India’s 10-year bond yields have mirrored the situation in developed nations, which have till now shown mild inflationary tendencies.
As long as inflation remains between 4 per cent +/- 2 per cent, RBI’s MPC framework should be able to handle the situation, but anything extraordinary will lead to the tightening of interest rates. Gold, an inflationary hedge, is currently at its support level, and is also not sending out any warning signal related to inflation. Therefore, investors should not worry about inflation and keep observing the bond market.
Event of the Week
While the US is boosting growth by lumpsum stimulus, India is looking to increase jobs and manufacturing through a production-linked scheme for sectors. The idea is to offer SOPs and cashbacks, aid exports to extend support and encourage the Make in India initiative. This will strengthen the asset creation cycle in the country and kickstart recovery to improve our GDP.
The PLI schemes have already been announced for electronics, tech, autos, telecom etc. This week, it was extended to pharma and IT hardware with over Rs 22,000 crore worth of sops incrementally aiding the value of exports. These initiatives, if they go as planned, can make India a global manufacturing hub with cheap labour, which in turn bodes well for the economy and the stock market as a whole.
Technical Outlook
Nifty50 closed the week negative, confirming the tendencies of the bearish engulfing pattern formed earlier in the week. Since Nifty remains overbought, a confirmation of the bearish signal with a Bearish Evening Star on the daily chart does indicate further caution. Nifty has also breached the immediate support of 14,630 and is likely to decline further till the next cushion support at 14,250 in the short term. Therefore, traders are advised to remain light on the long side.
Expectations for the Week
Going ahead, equity markets could remain under pressure as inflationary tendencies continue to worry investors. Now with the expectations of a fresh stimulus in the US, there could be more helicopter money in the system. However, how many more liquidity infusions will be needed for the economy to stand on its own.
Meanwhile, market participants should keenly keep an eye on bond yields and the movement of USD-INR pair, as it could see some depreciation. Investors in need of liquidity can book profit from certain pockets, but long-term investors should continue to remain invested.
Nifty50 closed the week at 14,529, down 3.02%.
