The Indian equity benchmarks went into a tailspin this week as they mirrored losses from their global counterparts. The main culprit is rising inflation, which has played a spoilsport for equity markets worldwide.
A drastic spike in inflation has forced central banks to hike interest rates reversing the interest rate cycle, which was at all-time lows. The Sensex and Nifty crashed by over 15 per cent from record highs hit in October. The current drop in benchmarks has sparked fears that India will verge into a bear market.
Typically, a bear market begins when an index falls 20 per cent from its record high. With Indian benchmarks down by over 15 per cent, many market watchers expect the country to enter a bearish phase.
The markets witnessed a similar situation in March 2020, when a nationwide lockdown was imposed to curtail COVID-19's spread. The National Stock Exchange's (NSE) benchmark index – Nifty 50 – fell 40 per cent from a record high of 12,430 on January 20, 2020, to hit a low of 7,511 on March 24, 2020.
However, the markets staged a strong rebound later that year on the back of the Reserve Bank of India's (RBI) liquidity boosting measures to revive growth. The central bank's record-low interest rates and the government's economic relief packages helped lift sentiments on Dalal Street.
The latest selloff in markets triggered a sharp overnight fall in US markets. According to analysts, this fuelled fears that fast-rising inflation will drive a sharp rise in interest rates, bringing the global economy to a standstill.
Inflation slowed in April after seven months of relentless gains. However, it remained close to four-decade highs.
Consumer prices jumped by 8.3 per cent last month, up from 12 months earlier, the US Labor Department said on Wednesday. That was below the 8.5 per cent year-over-year surge in March, which was the highest since 1981. The Nasdaq is also down nearly 8 per cent in May so far and 27 per cent this year.
Closer home, retail inflation soared to an eight-year high of 7.79 per cent in April on an annual basis. This was against the backdrop of stubbornly high food prices, and it remained above the RBI's upper tolerance level for the fourth month in a row.
Based on the Consumer Price Index (CPI), inflation was 6.95 per cent in March this year and 4.23 per cent in April 2021.
Following the surge in inflation, central banks are hiking interest rates. The last time these nodal institutions undertook this step in the US was in 1929. Since then, economies have not seen this kind of scenario, Vijay Chopra of Enoch Ventures told Outlook Business.
"Markets are extremely oversold, but they always tend to border on the excesses. Economies globally face inflation concerns, and the rate hikes we are witnessing were last seen in the US in 1929. Inflation is a fierce animal that is going to trouble central bankers. I am sure more rate hikes are in the offing, but the question remains how the growth will be managed," Chopra wondered.
The benchmarks fell for the sixth straight session ahead, for the week, Sensex dropped 3.72 per cent and Nifty 50 index plunged 3.83 per cent.
To overcome the prevalent situation, Chopra suggested that the administration consider lowering excise on fuel and cutting down on discretionary spending.
Finance minister Nirmala Sitharaman told Parliament in December 2021 that the central government earned Rs 8 lakh crore from taxes levied on petrol and diesel in the last three financial years. Over Rs 3.71 lakh crore was collected in 2020-21 itself.
The sharp decline in markets has left many retail investors clueless since they had bought shares at high prices and are now staring at massive losses. Moreover, the selling pressure in mid-and small-cap shares has been much faster as they tend to outperform large-cap shares while going up and underperform while going down, analysts said.
Many shares have corrected 40-50 per cent from their recent highs and have already entered the bearish phase, Rahul Shah, Co-head of Research at Equitymaster, said.
Some shares that have fallen between 30-50 per cent include Punjab National Bank, RBL Bank, Rain Industries, SAIL, India Cements, Granules India, Torrent Power, Apollo Hospitals, Bajaj Finserv, Godrej Properties, DLF, Tata Motors, Exide Industries, Hindalco, L&T Infotech and L&T Technology Services.
"When it comes to individual stocks, many have entered a bear market. Worse, some are down 30 per cent, 40 per cent and even 50 per cent from their highs. Therefore, investors with some cash on the sidelines can start nibbling at these shares where selling has been overdone due to fear, but long-term fundamentals are intact. They should keep things as simple as possible. Do not look for stocks that will perform the best over the next 2-3 years. Instead, look for the ones where you are not likely to lose money," Shah recommended.
Santosh Meena of Swastika Investmart advises investors to control their emotions and tread cautiously as further fall is possible, and there will be no respite on the volatility front.
"This market is not meant for the faint-hearted as further fall is possible, and there will be no respite on the volatility front in the short term. Investors, especially those who entered during the post-COVID bull market, have to taper their expectations and work hard to achieve a reasonable reason. Gone are the days when any stock would rise 10 per cent in a week or 30 per cent in a month or five times in a year," Meena said.
However, Meena recommended buying in dips to add quality stocks to the portfolio. "Investors must be cautious during these volatile times and follow these rules to achieve a good risk-adjusted return," he emphasised.
