The recent surge in US inflation figures for January has sparked concerns among investors, particularly regarding the anticipated rate cuts starting from March 2024. However, beyond its immediate implications for Western investors, does this inflationary trend in the US also reverberate in the Indian markets, affecting investors here? Read to know!
What’s Happening?
A glance at the Nifty 50 chart for 2023 alongside US inflation data reveals an intriguing inverse relationship between the two. As inflation eased in the US towards the end of 2023, Indian stock markets surged, reaching fresh all-time highs. Notably, the Nifty 50 breached the 20,000 mark in November coinciding with the lowest US inflation in six months.
Following the release of US inflation data on February 14, the Nifty 50 initially experienced a dip from the previous day’s level but recovered during the day session to close at a higher level. Analysts suggest that this correction is likely short-term, as mentioned in the Money Control, Siddharth Bhamre, Head of Research at Religare Broking, emphasises that one data point shouldn’t alter the medium-term outlook for FIIs (Foreign Institutional Investors) towards the Indian markets.
What’s in it for Investors?
The connection between Indian stock markets and rising inflation in the West merits closer examination. Heightened inflation prompts central banks to increase interest rates to curb it. Consequently, the Federal Reserve (FED) in the US raised interest rates from 0.50% to 5.50% between March 2022 and August 2023, leading to increased foreign institutional investor (FII) outflows from the Indian market as they sought higher returns elsewhere.
While FIIs briefly returned to India during periods of eased inflation in mid-2023, renewed inflationary pressures prompted another exodus, adversely affecting domestic stocks. Domestic investors also turned to fixed investment instruments as the Reserve Bank of India (RBI) hiked the repo rate from 4% to 6.50% between February 2022 and August 2023.
What’s Next?
Despite transient market reactions to US inflation data, India’s stable interest rates over the past year and declining retail inflation have provided resilience. However, concerns persist regarding earnings growth amidst geopolitical volatility and diminished global demand, impacting private capital expenditure, a key driver of economic growth.
In conclusion, while Indian markets exhibit resilience against short-term fluctuations triggered by US inflation, sustained earnings growth remains a focal point for domestic investors amidst evolving global dynamics.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
*Disclaimer: Teji Mandi disclaimer
