INDICES ON AN ACCELERATED COURSE; VIX SURGES 8%: Bear hug on recession fears

Stocks fell on Friday amid weak global signals as worries about a global recession, lingering inflation, rising commodity prices and the possibility of aggressive central bank tightening spooked investors.

As central banks around the world simultaneously raise interest rates in response to inflation, the world could be heading for a global recession in 2023 and a series of financial crises in emerging markets and developing economies that will hit them. would cause lasting harm, according to a new study by the World Bank.

The currently expected path of interest rate hikes and other policy measures may not be sufficient to bring global inflation back to pre-pandemic levels, the Bank warned.

“Global growth is slowing sharply, and further slowing is likely as more countries enter recession. My deep concern is that these trends continue, with devastating lasting consequences for people in emerging markets and developing economies” said World Bank Group President David Malpass.

Also Read: Warning Signs of Global Recession in 2023 as Interest Rate Hikes Threaten Economic Growth

The benchmark BSE Sensex index slid more than 1,200 points on Friday before closing at 58,840, down 1,093 points or 1.8%. The gauge has lost 1,731 points, or 2.9%, over the past three sessions and slipped 1.6% last week. The Nifty 50 stood at 17,530, down 346 points or 1.9%. The broader markets also suffered, with the Nifty midcap and smallcap falling in the 2.5% to 3% range. The volatility index – India VIX – jumped 8% to settle at a level close to 20.

Most Asian indices also ended in the red, with Jakarta Composite (1.9%) and Shanghai Composite (2.3%) slipping the most.

Index heavyweights such as Reliance Industries, Infosys, HDFC Bank, TCS and ICICI Bank contributed the most to the drop. All sectors ended in the red, with real estate, IT, oil & gas, consumer durables and autos falling the most.

Volumes on the NSE were the highest since May 31, helped in part by FTSE rebalancing trades. The expected decline ratio was significantly negative at 0.23:1. India VIX, an index that measures volatility, jumped 7.8% to 19.82.

Global rating agency Fitch on Thursday cut its growth forecast for the Indian economy to 7% in 2022-23 from 7.8%, with 2023-24 growth expected to slow further to 6.7% from 7.4% previously planned.

“Investors are expecting an aggressive rate hike next week, with a third of market respondents expecting the Fed to do 100 basis points, when a 75 basis point hike is generally expected. The negative impact of this has also been felt in the Indian stock market over the past three sessions, including extended losses on Friday,” said Aishvarya Dadheech, fund manager, Ambit Asset Management.

Indian equities have held up well over the past two months and have largely outperformed major global markets.

The pick-up in IFP inflows into equity markets and rising expectations for India’s inclusion in global bond market indices have led to a stable currency and resilient bond markets over the past month. REITs bought shares worth $1.5 billion in September.

The external environment remains challenging, however, with global commodity prices remaining well above pre-pandemic levels.

“This exposes the economy to uncertainty, especially on external stability. Indeed, the trade deficit remained close to all-time highs in July and August and we expect the current account deficit to reach a nearly 10-year high of 5% of GDP in the quarter ending September As the CAD widened, a reversal in REIT flows in August, alongside RBI FX intervention (the foreign exchange reserves have fallen by $20.8 billion since the end of July) have helped keep the currency stable,” said a report from Morgan Stanley.

The RBI will most likely have to raise rates by 50 basis points at its next policy meeting to combat pressure on the rupee, experts say. Yields on 10-year Indian government securities jumped 15 basis points to 7.25% over the past three days.

“We believe the market is likely to be volatile in the near term. Investors should use volatility over the next few weeks in a gradual fashion to build a position with a 12-18 month view in quality companies where earnings visibility is high,” said Neeraj Chadawar, Head of Quantitative Equity Research, Axis Securities.

According to him, domestically oriented themes such as banks, consumer staples, hospitals, domestic industries and consumer discretionary are well positioned relative to export-oriented and cyclical themes.

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