More Pain Ahead For Indian Stocks; Inflation And Fed In Focus

After benchmark Indian indexes crashed on Friday, marking their first weekly drop in four, the intense selling pressure is likely to continue in the week ahead as investors across the globe remain concerned about the impact of aggressive monetary policy tightening on economic growth.

India's retail inflation data for May and the US Federal Reserve decision on rates and policy path after the meeting are the crucial factors that would dictate equity markets' moves.

The dollar climbed to a nearly four-week high against a basket of currencies on Friday after data showed US consumer prices accelerated in May, strengthening expectations that the Fed may have to continue with interest rate hikes through September to combat soaring inflation.

The inflation report was published ahead of the Fed's anticipated second 50 basis points rate hike on June 15.

The US central bank is expected to raise its policy interest rate by an additional half a percentage point in July. It has hiked the overnight rate by 75 basis points since March.

The dollar index, which tracks the greenback's performance against six other major currencies, was 0.8 per cent higher at 104.16, its highest since May 17, and within sight of 105.01, the two-decade high touched in mid-May.

The index was up nearly 2 per cent last week, marking its best weekly performance in 6 weeks.

"All eyes will be on the US FOMC (Federal Open Market Committee) decision scheduled on June 15, and the market is fearing aggressive rate hikes amid inflation monster. Bank of Japan will also announce its credit policy on June 17," Santosh Meena, Head of Research at Swastika Investmart, told PTI.

"It will be crucial to see FIIs' behaviour amid panic in global equity markets because they have been selling relentlessly for the last eight months," Mr Meena added.

On the domestic front, CPI inflation will be announced on June 13 and WPI on June 14, he added. "Apart from this, rupee and crude oil movement will be other important factors," Mr Meena noted.

The Sensex nosedived over 1,000 points, while the Nifty slumped to the 16,200-level on Friday as investors dashed to safer assets as inflation fears and the resultant aggressive central banks' policy triggered a global sell-off.

"The equity market across market caps and sectors traded lower on account of several factors, mainly global. This has been the broader trend during the course of the week gone by. The Fed meeting next week, the results of which will be known by June 14 evening, is also a major event the market is looking forward to, and most analysts expect a hike of 50 bps...," Joseph Thomas, Head of Research at Emkay Wealth Management told PTI.

Worries that aggressive tightening of monetary policies to combat stubborn inflation could stifle economic growth have weighed on global investor sentiment, which is likely to continue in the near term.

"Global stock markets are seeing negative moves post the ECB meeting. Until the next US Fed outcome, Indian markets could remain directionless," Narendra Solanki, head of equity research (fundamental) at Anand Rathi Investment Services, told Reuters.

The rupee tumbled to close at a fresh all-time low of 77.93 against the US dollar on Friday on soured sentiment. Over the week, the rupee repeatedly hit record lows as the dollar reigned supreme.

A sell-off in equity markets also weighed on the currency.

Unrelenting foreign fund outflows have hurt the rupee, with foreign investors pulling out nearly Rs 14,000 crore from Indian equities in June.

While the FII exit from the local market continued unabated, the Reserve Bank of India policy announced to focus on normalisation of liquidity and withdrawal of accommodative policy, both of which may hurt the markets in the coming weeks, added Emkay Wealth Management's, Mr Thomas.

With the US inflation data knocking investors' risk appetite, markets are set to reel under tremendous pressure across the globe following prompt swift actions expected by major global central banks ahead.