Indian stocks extended their losses from the previous week and fell further on Monday morning after the latest rate hike by the US Federal Reserve in its fight against high inflation. At 10:49, Sensex was trading at 57,253.40 points, down 845.52 points or 1.46%, while Nifty was trading at 17,043.90 points, down 283.45 points or 1.64%.
The latest drop reversed positive sentiments in the domestic market that continued for two months. High rates from the US Federal Reserve and tighter monetary policy at central banks around the world hinted at a sell-off to investors.
On Friday, the key indices, Sensex and Nifty fell almost two percent, leading to an erosion of more than $4 lakh crore of investor wealth amid weak global signals.
Further tightening of monetary policy in the US essentially means that investors will have a tendency to move to US markets for better and stable returns. The US Federal Reserve had raised the repo rate by 75 basis points, which is the third consecutive hike of the same magnitude, in line with expectations. The Fed also hinted that more rate hikes were to come and that these rates would stay elevated until 2024.
The US central bank seeks to achieve the maximum level of employment and inflation at a rate of 2 percent in the long term and anticipates that the current increases in the target range will be appropriate. Raising interest rates is an instrument of monetary policy that generally helps suppress demand in the economy, which helps the rate of inflation decrease.
Stakeholders will watch the RBI’s Monetary Policy Committee meeting on September 28-30 closely, as markets anticipate a 50 basis point increase in the repo rate. Foreign exchange reserves, down 14 percent from the peak, will also keep markets on edge.
Meanwhile, continuing to depreciate, the rupee fell further from last week’s low and reached another record low on Monday morning. This steady depreciation follows the continued strengthening of the US dollar index to a two-decade high, with the hope that demand for safe-haven currency like the dollar will pick up.
This morning, it crossed 81.50 against the US dollar. On Friday it closed at 81.25. Notably, last Thursday’s depreciation was the rupiah’s biggest single-day decline since February 24.
“The panic is created by the dollar index, which is witnessing heavy buying as a strong hedge against interest rate hikes and the inflation cycle. The rupee’s downtrend will continue as long as no positive triggers are seen from the currency front.” inflation. The next trigger for the rupee will be next.” week is RBI policy that will provide a respite from the rupee’s decline. Rupee range can be seen between 80.50 and 81.55 ahead of RBI policy,” said Jateen Trivedi, VP research analyst at LKP Securities.
India’s foreign exchange reserves are at a two-year low. Reserves have shrunk by almost US$80 billion since tensions between Russia and Ukraine escalated into war earlier this year.
India’s foreign exchange reserves have been steadily depleting over the past few months due to the likely intervention of the RBI in the market to defend the depreciation of the rupee and for the country’s trade liquidation. This exhaustion is another possible reason why the rupee has weakened.
Typically, the RBI intervenes in the market through liquidity management, including the sale of dollars, with a view to preventing a sharp depreciation of the rupee. A depreciation in the rupee generally makes imported items more expensive.